Current Market Outlook and What the Investor Should Do

Market Outlook for today, tomorrow or for next week or next few months

The rise of equity markets over the last 20 days has not only taken investors by surprise but also led to uncertainty. If there are some who are unsure whether to remain invested or book profits, there are many who are wondering if they should enter the markets at such high levels.

Data show that foreign portfolio investors (FPIs) are taking medium- to long-term positions in the Indian market. They have pumped in a net of over Rs 42,000 crore in November alone, so far. In fact, FPI inflows this year are set to be the highest ever — the net FPI inflow for FY21 has already reached Rs 138,107 crore, marginally short of the Rs 140,032 crore in FY13.

So, if you were to follow FPIs, there is a clear signal to invest or to remain invested. On the other hand, if you look at the trend of domestic investors, it would emerge that they have been busy booking profits amid the sharp rise in markets. Trade data of domestic institutional investors including mutual funds show that they have pulled out a net of close to Rs 30,000 crore in November. It is important to note that DIIs don’t invest or book profits for themselves — if mutual fund investors start redeeming their units, the fund house will have to sell stocks in the scheme to honour the redemption.

The rally is clearly driven by positive news flows. The outcome of the US Presidential election in the first week of November fuelled FPI inflows into emerging markets and led to a sharp rally in equity markets worldwide including in India. This was followed by successive announcements of promising results in Covid-19 vaccine trails by Pfizer & BioNTech, Moderna and Russia, boosting equity markets over the last 10 days.

The result has been that FPIs have pumped in large sums of money into Indian equities in November, and the Sensex has rallied by over 4,100 points or 10.6% in the same period.

For now, the markets are flush with liquidity — and since money will find its way into the equity markets, they are likely to remain strong. Market participants, however, remain cautious, and there is a feeling in the market that the investment stories will keep changing — from large caps to mid- and small caps, from pharma and IT to banking and finance, and then to infrastructure-oriented sectors, etc — and so, investors need to do their due diligence while parking their funds.

Fund managers with mutual funds as well as brokerage houses say investors must look at quality companies and not get swayed by the rally.

While FPIs have been investing, many say that once retail investors start investing, so will domestic institutional investors.

Investors should never look at levels to invest. While it matters for traders, it doesn’t matter for disciplined monthly investors who are willing to invest for 10, 15 or 20 years. Investments should be done in a disciplined manner, and there is no harm in starting now. One must remember that whenever the Sensex has hit a new high or landmark — be it 10,000, 20,000, 25,000 or 30,000 — each of these levels has seemed expensive at that point of time. However, with time, investors have concluded that it was a mistake not to have started investments then.

With the Sensex having rallied swiftly by 4,180 points or 10.6% in a matter of 14 trading sessions, there is always a possibility of some profit-booking, and thus a dip in the market — but that does not mean it will not achieve new highs. In fact, dips should be utilised to invest further.

Major brokerage houses are advising our clients to not get carried away by the exuberance and, instead of chasing the rally, they should chase quality companies or invest through mutual funds.”

Caution is necessary, however, for investors who are nearing retirement, and who cannot afford to remain invested for much longer. They would do well to book some profits at these levels, and start parking them in safe debt instruments.

And even they should not pull out all their equity investments. Given the average longevity, if someone is 55 years old, they may start booking profits on some investments that may be critical for the post-retirement monthly income, and leave the rest for another 10 years or 15 years, and withdraw when they turn, say, 65 or 70, depending on the need.

Those who have been looking to book some profits to utilise the money for any of their financial goals can do so at this time as the markets are trading high.

It is important to understand that interest rates are certainly not going to go into double digits, and so equities could be the best bet for protection against inflation.

Even as three vaccines have reported high efficacy in phase 3 trials, and are expected to be made available over the next couple of months, many feel that the impact in India will be slow in comparison to low-population countries, as it will take a longer time to cover the massive population. There are also concerns over the pace of economic recovery, as India is among the countries hardest hit by Covid-19 in terms of economy.

While the markets have had a significant rally, George said, “I do not see that the economy will jump in the immediate future to justify the market levels… However, FPIs are taking a call on the Indian economy and investing in the market.”

In fact, a report by Oxford Economics on Thursday said that India’s growth equilibrium will worsen over the medium term, and potential growth would average at 4.5% over 2020-25, as opposed to its pre-coronavirus forecast of 6.5.

Global brokerage firm Goldman Sachs believes the bull run in global markets will continue despite a near-term blip in the equities following a sharp rise in stocks since March lows. The domestic equity market has rallied over 50 per cent since March 23 due to liquidity measures taken by the government and RBI amid sustained inflows by foreign institutional investors. The Sensex traded 0.24 per cent down on Thursday amid weak global cues. 

However, Goldman Sachs says the rally in Indian stocks will continue.

The ‘Hope’ phase – the first part of a new cycle, which usually begins in a recession as investors start to anticipate a recovery, is typically the strongest part of the cycle. That is what Goldman Sachs has been seeing this year.

The stock market has been very sensitive to updates on coronavirus remedies and treatments in this pandemic era. The vaccine outlook has become clearer and more positive, and the economic benefits for the US appear particularly large due to its leadership in the vaccine race and a worse starting point in terms of virus control. Goldman’s economists now factor into their forecasts the approval of at least one vaccine this autumn, with widespread distribution and positive growth effects felt in the first half of 2021. It believes that a vaccine would accelerate the recovery starting in Q1 2021, particularly in the consumer areas that are highly sensitive to mobility.

Goldman Sachs has recently made upward revisions to their economic forecasts. “This is typically what we see in the early stages of recovery from a bear market. The exception is after recessions when they tend to move higher. Upward revisions could well drive equity markets higher,” it said.

Its bear market indicator (GSBLBR), which was at elevated level in 2019, is pointing to relatively low risks of a bear market despite very high valuations. However, it believes that high valuations could limit long-term returns for investors. However, Goldman Sachs added that the indicator is indicating double-digit returns over the next 5 years.

Policy support remains very supportive for risky assets. There is both a central bank ‘put’-a belief that central banks will be there to provide as much liquidity as is required-and a fiscal ‘put’ as governments have scaled up their willingness to support growth.

Goldman Sachs believes that we are now entering a new economic cycle which, with moderate growth, inflation and interest rates, may well be as long as the last one (in the US, the longest for 150 years). If this is the case, and strong policy support is reducing the risks of another recession any time soon, then the ERP (equity risk premium) may well decline.

The resumption of zero nominal interest rate policy in the recent past, together with the extended forward guidance, has created an environment of greater negative real interest rates. This should be highly supportive to risk assets in an economic recovery.

From the current extreme lows in bond yields, equities are also likely to outperform in an environment where bond yields rise. Equities also look cheap relative to corporate debt, particularly for strong balance sheet companies (60 per cent of US companies and 80 per cent of European companies have dividend yields above the average corporate bond yield). Goldman Sachs also added that the digital revolution continues to gather pace. “We think this transformation of the economy and stock markets has further to go. These companies could continue to drive valuations and returns in this bull market,” it added.

Trying to game out anything in the 2020 financial market can be a humbling experience. Massive fiscal and monetary stimulus has been doing battle with a historic recession and a pandemic. Would you have expected a crash? You got one in February and March. And then came a rally right on its heels, bringing stocks back near record highs.

So nothing is obvious. Still, on the list of events with the potential to reorder sentiment on a dime, one prospective catalyst is on almost every forecaster’s mind: the discovery of a vaccine for the Covid-19 coronavirus.

With three experimental Covid-19 vaccines showing promising signs and the stock market hitting new record highs every other day, is the uncertainty behind us? 

 Not yet, warns Shyamsunder Bhat, who is a long-term investor in domestic equities as the Chief Investment Officer of Exide Life Insurance. He says the launch of a vaccine will not solve the problem immediately for investors. “Not just the vaccine launch. The market will wait for a few months to see the efficacy of the vaccine concluding if the uncertainty is behind us or not," Bhat said.

Pfizer and BioNTech hope to start delivering their vaccines in the market as early as next month after getting necessary regulatory approvals. 

 But Bhat, a market veteran, says for Dalal Street for achieve stability, both Covid vaccine and the availability of liquidity would be important. “Central banks’ firepower may be somewhat limited compared with what we have seen in last six months. The central banks, going forward, are likely to have an accommodative stance, but compared with kind of liquidity increase seen in last six months, the incremental rise is likely to be smaller from here on," he said.

Ideally, retail investors should invest in professionally managed funds, be it mutual funds or insurance products, rather than risking a significant part of their investments by picking stocks on their own, or going with the market momentum. Unless they have the ability to do stock research themselves, they should not dive into stocks independently.

Pointing out how companies with higher growth have continued to command higher P/E multiples in the last few years, Bhat said value stocks have become cheaper and are yet to find favour.

However, we could eventually see some allocation moving into value stocks, where growth may be nil or modest, but which are attractive in terms of valuations and where companies themselves do not have any balance sheet or corporate governance concerns.

With the Indian economy still in a recession technically, investors who are uncomfortable with pricey valuations in the ongoing bull market have chosen to keep their powder dry and wait for the bubble to burst. 

 It is difficult for anyone to time the market because you have to time it right twice - while buying as well as while selling. Some retail investors might have got their entry time right by investing at the lows of March and April, but it is also important to exit at the right time if specific stocks or sectors exhibit bubble-like valuations.

There is the possibility of a correction. Given the unpredictability of the market, the ideal strategy is to follow systematic investing by staggering your investments and buying through the ups and downs of the market.

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