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Most stocks shine on hopes of economic recovery

By Sundar Sethuraman
June 17, 2021 17:35 IST
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Since mid-April, investor appetite for risk assets in India has seen a quick and dramatic improvement, underpinned by declining Covid cases and a ramp-up in vaccinations.

The market breadth has turned sharply positive since May amid hopes that a decline in Covid-19 infections will lead to a revival in the economy.

At 3.8, the advance-decline ratio (ADR) for May was the best since June 2020.

 

So far this month, the ratio has remained above three — in simpler words, for every declining stock, there were nearly four advancing stocks in May and three this month.

ADR is a popular market breadth indicator, with a ratio of more than two signalling an extremely bullish undercurrent.

An ADR of more than three indicates that stocks across the board are seeing buying interest.

In June 2020, the ADR stood at 4.3 per cent as aggressive monetary easing by global central banks fuelled an unprecedented rally in the equity market.

In March this year, the ratio had slipped below 0.7 per cent as a lethal second Covid wave threatened to derail the economic revival.

Since mid-April, investor appetite for risk assets in India has seen a quick and dramatic improvement, underpinned by declining Covid cases and a ramp-up in vaccinations.

Corporate earnings for the March quarter also helped sentiment.

"The global economic recovery has created a healthy risk appetite across asset classes. As we have seen last month, we are recovering from the second wave in India.

"And that has led to an improvement in investing conditions,” said Saurabh Mukherjea, founder and chief investment officer, Marcellus Investment Managers.

But several analysts warn that the consistently high market breadth is a sign that the market has turned complacent.

Ambareesh Baliga, an independent analyst, said: “Investors started ignoring the negative macro indicators once Covid cases started to peak.

"The markets have been indifferent even to high inflation and a spike in oil prices."

Experts said there could be a bubble building in small- and micro-caps as many new investors are simply lapping them up without understanding the fundamentals.

Since May, the benchmark Nifty has risen 7.8 per cent, while the Nifty Smallcap 100 index is up 14 per cent and the Nifty Midcap 100 index is up 13 per cent.

"The action shifted to small- and mid-caps. In any bull run, we see large-caps moving up initially, followed by mid- and small-caps and then the action shifts to penny stocks," said Baliga.

Analysts said the market breadth may not sustain at current levels.

"What could cause that fall is more global at the moment," said Andrew Holland, CEO Avendus Capital Alternate Strategies.

On Wednesday, the ADR fell to 0.8 as investors turned cautious ahead of the US Fed policy announcement.

"Because of liquidity, we are seeing this trend sustaining but finally any rally has to be supported by fundamentals.

"Compared to the previous wave, the second wave of Covid has done much emotional damage and people fear the third wave.

"All this will translate into low growth in the next one or two quarters, which the markets are not absorbing," said Baliga.

Holland said a lot of the optimism in the markets has to do with the retail side.

"It's a broad-based and more retail and high net-worth investors driven rally.

"There will be some small-caps are rising for no real reason, and they will come off anyway. One cannot paint everyone with the same brush and simply say all companies are doing great,” said Holland.

Photograph: Shailesh Andrade/Reuters

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Sundar Sethuraman in Mumbai
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