‘Investors should reduce exposure in equities, but IT stocks may continue to outperform’

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This week, domestic market was mildly positive compared to upbeat Asian peers, which was inclined by better-than-expected Chinese economy data, bounce in tech stocks and importantly Chinese central banks plan to cut bank rate to inject funds in the economy. The India market extended its gains to all-time high supported by rally in IT sector, Reality, Financials and Metals stocks, in anticipation of robust Q1 earnings & recovery in demand. Ease in CPI & WPI inflation on a MoM basis owing to softening of crude oil and food prices did help the market. Compared to this, developed western markets were muted due to high inflation and cautiousness over upcoming Fed policy meet that would likely discuss on tapering, started on July 27-28.

Indian market ended with minor gains compared to the upbeat Asian peers, that rose on better-than-expected Chinese economic data, recovery in IT stocks and most importantly, China’s plan to draw down interest rates to boost liquidity.

Indian markets touched all-time high levels in the week gone by supported by IT, metal, financials and realty stocks. Ease in CPI & WPI inflation on a month-on-month basis amid softening of crude oil and food prices also boosted investor sentiment. However, the upside was limited as the developed western markets turned cautious amid high inflation and potential tapering of interest rates in the upcoming Fed policy meet.

On a year-to-date basis, the second wave of COVID-19 has taken a toll on the Asian markets. Also, the crackdown on large Chinese companies, uncertainty in Hong Kong, rising tension between US & China, high inflation and FII selling hurt market sentiment. However, Indian markets have managed to buck the trend in the Asian markets, as observed by the 9 percent seen in Nifty500. This makes us more in line with western markets like Dow Jones & Dax, which are up 16 percent and 14 percent, respectively, in 2021.

A key factor for the Indian market to do well is the sustenance of the global market. Importantly, the outlook for the US market was held positive due to repeated assurance provided by Fed Chair Jerome Powell - that the post lockdown surge in inflation is short-term in nature and not will likely temper their current Quantitative Easing policy. For India, high inflows from MF & retail investors did help to perform better despite FII selling. In the future, despite the rising dominance of India in global trade, a lot will depend on the rally and tone of the direction of developed markets. Domestically, a factor to note will be the level of leverage in the equity market, visible in the increasing funding for IPOs by HNIs.

When we look at the level of return or upside possible for main indices like Nifty50, it looks limited in the short to medium-term. Geojit Research, fundamental target for Nifty50 is 16,165 for December 2021, +/- 5 percent margin of error, with the closing on July 16, 2021 at 15,923.40. When we look at the broad market, the outlook looks more progressive. Analysts are still upgrading earnings forecasts & valuations with a higher stock target price. This is largely because of rising business outlook, maintaining its buoyancy due to economic gains from unlocking & strong management commentaries. The market is also supported by high liquidity, low cost of interest rate and attractive IPOs.

We expect the overall market to maintain its positive trend, but volatility can emerge based on the trend of the global market. Sector specific pofit booking is advised based their respective valuations & outlook. Overall, we do advise investors to reduce the level of equity in their portfolio by increasing the portion of debt & gold by cutting mid & small caps. This is anticipation on a short to medium-term basis.

An important development in the week has been marginally better-than-expected Q1 results for the IT sector. More than the results, the backlog of orders and deals has increased much better, leading to a larger upgrade in outlook. This is leading to an upside in earnings forecasts & stock target price due to a raise in ratings & valuations. Companies are reporting strong growth in Banking Financial Services & Insurance (BFSI), healthcare, retail, and manufacturing Verticals. Businesses in major markets like the US and Europe are showing increased demand for digital transformation, cloud migration, and adopt technologies like Artificial intelligence, Internet of things, Blockchain, etc. The sectors are likely to outperform the market in the short to long-term basis. Investors can increase their exposure in this defensive & high-quality sector, in such a highly valued market, by buying into branded large and mid-caps IT companies.

The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Asian shares slip as new COVID cases rise

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Asian shares stumbled on Wednesday, giving up early gains, while the dollar was firm as investors worried that a fast-spreading coronavirus variant could impede a global economic recovery.

But European share markets were set for a slightly higher open following sharp falls early in the week, ahead of a European Central Bank meeting on Thursday that is expected to convey a dovish tone.

Euro Stoxx 50 futures rose 0.16% and German DAX futures were up 0.07%. FTSE futures added 0.08%.

The Delta coronavirus variant has for the moment displaced inflation as investors’ primary source of concern, with South Korea on Wednesday reporting a daily record of new infections.

Last week, data showing a surge in U.S. consumer prices in June had sparked fears that the Federal Reserve could bring a quicker end to emergency stimulus measures.

The shift from a debate over whether price spikes are transitory to outright fear of the impact of the latest COVID-19 surge has pushed the U.S. 10-year yield down more than 20 basis points in the space of a week as investors have moved into safe haven assets. The S&P 500 slumped nearly 4% from highs last Wednesday to lows on Monday before rebounding.

On Wednesday, MSCI’s broadest index of Asia-Pacific shares outside Japan reversed early gains to slip 0.14%, extending losses for the week to more than 2%.

Seoul’s KOSPI slid 0.29% and Hong Kong’s Hang Seng index fell 0.46%.

Japan’s Nikkei was 0.6% higher after touching six-month lows a day earlier, as investors bought cyclical stocks ahead of a long weekend that will mark the start of the Tokyo 2020 Olympics and as a jump in exports in June boosted hopes for an export-led economic recovery.

Chinese blue-chip shares were also higher, up 0.81%

”The level of volumes, the level of sporadic whip-saw price action I think is telling you that there’s not a lot of conviction one way or another,” said Kay Van-Petersen, global macro strategist at Saxo Capital Markets in Singapore.

But while he said peak global growth had likely passed, easy central bank policies continue to provide strong support for global asset prices even as they begin to flag the tapering of asset purchases.

”The G4 central banks’ balance sheets have been compounding by 15% since 2008. And my point is that’s not going to stop. It’s not going to get shut off.”

U.S. Treasuries prices edged down, with the 10-year yield rising to 1.2151% from the previous day’s close of 1.209%. The 2-year yield was at 0.2037%, up from a close of 0.194%.

But echoing concern in equities markets over a surge in global COVID-19 infections, the dollar stayed near three-month highs on Wednesday.

”While some of the world is shrugging off rising infections as vaccination rates limit the severity of any symptoms of new cases, there are few parts of the world that can totally ignore this,” said Rob Carnell, Asia-Pacific chief economist at ING.

The dollar index was last up 0.08% at 93.041, with the euro down 0.07% to $1.1771. The dollar was 0.05% stronger against the yen at 109.89.

Oil prices resumed their decline after a rebound on Tuesday, as an industry report showed an unexpected build-up in U.S. oil inventories.

U.S. West Texas Intermediate crude dropped 0.46% to $66.89 per barrel and Brent traded at $69.06 per barrel, down 0.42% on the day.

Spot gold shed 0.07% to $1,808.84 an ounce as U.S. yields rebounded.

Germany’s DAX index breaches 14,000 points for first time

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Germany’s blue-chip DAX 30 index crossed the 14,000-point mark for the first time ever on Thursday, as traders shrugged off the US violence and welcomed the confirmation of President-elect Joe Biden’s win.

The Frankfurt index climbed to an all-time high of 14,006.70 points in late afternoon trading, setting the latest in a series of records in recent days.