Caution in market even as analysts see indices hitting record highs

NEW DELHI: There is no doubt in the minds of analysts on Dalal Street that benchmark indices will hit fresh record highs in the coming days as economic activity picks up with the states starting to unlock. At the same time, they are also becoming increasingly cautious.

Technical charts and rollover data point towards Nifty50 crossing the 16,000 level soon but as the volatility indicator has plunged to pre-pandemic levels, a sense of complacency is also present among traders, which can hurt them. Hence, caution is required, argue analysts.

Another factor is there is no clarity on how soon a rate hike can be seen. The central bank of Mexico unexpectedly raised the policy rate to 4.25 per cent on Thursday. Federal Reserve officials have increasingly become more hawkish. Chatter from China also hints at inflationary control measures.

This is causing the retracement in metal prices. Now, it remains to be seen if it is just a minor hiccup in the supercycle or it is way past the top and has become a question of deliberation.

“One thing is clear that the exemplary growth in commodity prices might not continue at the same pace going forward. Investors can therefore maintain a wait-and-watch approach and instead of basing trades solely on commodity price movements, they can observe the deleveraging in the balance sheet of companies,” said Nirali Shah, Head of Equity Research, Samco Securities.

“The utilisation of capital and free cash flow trend over the next few months will help separate the great from the good. Part profit booking can also be considered in the next leg of an up move,” she added.

FIIs have been bullish on Indian stocks in recent weeks, becoming the major force behind the surge in indices. But any talk of a rate hike may reverse this trend. Moreover, Indian fund houses have also started increasing cash levels, keeping their powder dry.

Globally, markets are also buoyant especially after the Biden administration clinched a deal to pass his ambitious infrastructure package. Many analysts expect domestic indices to mirror global equities next week.

“The benchmark is hovering near a record high largely led by a gradual pickup in economic activities, as states start unlocking, the expectation of better earnings and ramp-up of vaccination,” said Ajit Mishra, VP – Research, Religare Broking.

“On the flip side, the possibility of the third wave of Covid can impact market sentiments. We remain cautiously optimistic on the markets and suggest aligning the positions accordingly.”

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