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    Bank, NBFC fund-raising spree giving wrong vibes; time to turn extra-cautious

    Synopsis

    A break below the 10,600 level will significantly dent the strength of the bulls.

    Jimeet Modi

    CEO, Samco Securities & StockNote

    The founder & CEO of SAMCO Securities, StockNote and the Indian Trading League Company, Modi believes that price is the most important factor in investing. He is credited with developing the AIRM (TM), an approach to screening stocks and businesses in a scientific manner. His role model is Warren Buffett.

    The domestic equity market continued its fractured up-move, defying grim economic growth prospects for India as well as the world as projected by the IMF in its latest report. It seems first-time investors, who can also be termed as lockdown players, and traders have taken this market higher by shoring up share prices of smallcaps and penny stocks.

    Majority of the stocks in BSE500 and Nifty50 indices are hovering close to 200-day moving average levels, which has brought the market to a state of equilibrium. Going forward, even the slightest liquidity push can take the market higher. But this seems unlikely to happen given the outflow of funds.

    The mutual fund industry witnessed its lowest monthly net inflows to equity schemes in four years at Rs 240 crore, which implies a lot of redemption in domestic equity funds. At an aggregate level, average mutual fund AUMs have reduced by nearly 8 per cent QoQ. This can attributed majorly to redemptions during the April-June period of 2020.

    A large chunk of liquidity will also be squeezed out from secondary markets by FPOs, IPOs and QIPs. Too-big-to-fail financial institutions like ICICI Bank and Axis Bank are expected to raise amounts of Rs 15,000 crore each, non-bank lender HDFC is planning to raise around Rs 14,000 crore to meet any potential inorganic growth opportunities, SBI has taken an enabling resolution to raise Rs 20,000 crore. Many more would come one by one to raise money.

    This optically raises a question mark on the financial sector of India. Why is so much money required so suddenly? Investors are hoping that by September quarter earnings, clarity will emerge. But it is also expected that majority of money will be raised prior to September quarter.

    Only time will tell how India Inc’s September quarter earnings pan out. But given all these fund raisings, it seems all is not well. Investors are advised to remain cautious while picking NBFCs and PSU banks for now.

    Event of the Week
    The country’s largest software services firm, Tata Consultancy Services, reported its Q1FY21 net profit at Rs 7,008 crore vs Rs 8,049 crore reported for the previous quarter. The IT giant’s constant currency revenue growth slipped 6.9 per cent.

    However, taking a forward-looking view, the IT major has given a glimmer of hope that margins would be back to pre-Covid levels by Q4FY21. Its software and IT services verticals are expected to accelerate growth post Covid-19. It would be interesting to judge future growth of other manufacturing and services companies from their Q1FY21 results and management commentaries.

    So far so good for TCS operating in IT services. But a health check-up of the real economy is needed for the markets to find their feet at current juncture.

    Technical Outlook
    Nifty50 opened with gap-up this week. However, the trading range remains very narrow compared with previous weeks. The entire rally from the bottom of 7,500 unfolded in the form of a Rising Wedge formation. At the current juncture, Nifty is trading around the resistance of Rising Wedge and is approaching the crest of the wedge.

    The participation in the ongoing rally has not been broadbased; only a few heavyweights are driving Nifty higher. The Bank Nifty index, which had been rising mutedly until now, outperformed the benchmark index during the week gone by, and financial stocks have contributed the most towards Nifty gains.



    We believe the market is a little stretched in the short term and expect very limited upside. A break below the 10,600 level will significantly dent the strength of the bulls.

    Expectation for the Week
    Reliance, largest private sector company by market-cap, has scheduled its AGM in the coming week. Going by past records, RIL’s AGM improves the mood of its stock and given the huge weightage it has on the index, the market is expected to remain on the higher side unless negative global cues spoil the RIL AGM party. This time it is expected that the AGM would garner maximum viewership given the slew of deals for Jio Platforms. Q1FY21 earnings season has been a bit slow, but it will be important to assess the post-lockdown scenario and the extent of demand uptake in the economy. Nonetheless, the earnings are expected to be exceptionally weak, but commentaries are likely to be strong enough and they would keep the prices where they are in a narrow range.

    In general, bigger trend triggers will emerge on the back of how the developed countries and foreign funds behave and respond to the post Covid-19 market dynamics. Domestic factors may not see any major impact over the next few weeks. US markets are likely to remain rangebound, but any crack can bleed domestic bourses as well.

    Investors are advised to stay on the sidelines, not indulge in FOMO buying and wait patiently. However, they should continue with their SIPs and regular investments in the market.

    Nifty50 closed the week 1.5 per cent higher at 10,768.

    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    6 Comments on this Story

    Cool Dude23 days ago
    The share market is sustaining because of the pressure put by govt to LIC ,BANKS & MF to pump more than 20 lac crores to help & recover the Crony corporates shares & Jumla party electrol sponsorers.
    Binu Pillai23 days ago
    Share market has BUBBLED UP... Best time for companies to do Fund raising, FPO, Rights issue..
    Rathish Kannah23 days ago
    So NIFTY might nosedive from here. Lets see where it goes.
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