Beware! These risks may halt the current bull-run in the markets: Analysts

FM Nirmala Sitharaman announced Rs 1.18 trillion-financial allocation for the highways sector in Budget 2021. However, any delay in roll out of such growth-driven projects may wear-off the bull-run

Markets have been soaring at the bourses after the Union Budget for 2021-22 gave the necessary booster shot to a dilapidated Indian economy. Laced with infrastructure programmes, privatisation proposals, nod to public sector banks’ recapitalisation, and no changes in the direct tax regime, it proved to be one of the “best in decades” for the economy.

At the bourses, frontline indices are hitting record highs every day. With today’s gains, the S&P BSE Sensex and the Nifty50 are up over 11 per cent since January 29, and have more-than-doubled since their March 2020 lows. The BSE barometer of 30 constituents hit a new lifetime peak of 51,836 today while the broader 50-share Nifty hit 15,257.

From a medium-term perspective, Morgan Stanley sees the Sensex hitting the 55,000-mark by the end of 2021.

That said, investors, whose wealth soared by a massive Rs 11 trillion since Budget day, should keep an eye on certain risks that may halt the current rally.

FII selling: The current market rally has been fueled on the back of a substantial inflow of foreign capital into Indian equities. So far in CY21, FPIs have pumped in Rs 31,678 crore in the equities market, NSE data show. Adjusting for outflow from debt, debt-voluntary retention route (VRR) schme, and hybrid schemes, net inflow stands at Rs 28,537 crore. Any reversal in this trend, analysts fear, may also halt the market rally.

“Liquidity is a friend of the trend. As and when the trend reverses in the economy, the FIIs may take the money out putting breaks on the rally,” says Ambareesh Baliga, an independent market analyst.

Moreover, Neeraj Chadawar, head-quantitative equity research at Axis Securities, says the continuous sell-off by domestic institutional investors (DIIs) remains a key risk. “If FIIs started selling and DIIs are unable to buy the positions, then we could see downward pressure in the market as most of the positives are already priced in,” he says.

Interest rate hike: Most central banks around the globe have held interest rates to bare minimum to enable credit off-take in the economy.

“If interest rates begin to rise globally and FIIs find other alternate and attractive investment opportunities then flow of money from abroad may halt or reverse. If the current liquidity corrects, then our markets will also correct,” says Deepak Jasani, head of retail research at HDFC Securities.

Last week, China decided to increase short-term interest rates with some key tenors approaching the higher end of the interest rate corridor. 

Delay in execution of budget proposal: Finance minister Nirmala Sitharaman announced Rs 1.18 trillion-financial allocation for the highways sector in Budget 2021. However, any delay in roll out of such growth-driven projects may wear-off the bull-run, say analysts. 

“The investment-led growth augurs well for a sustainable growth recovery from a long-term perspective. However, we acknowledge the execution challenges to the stated intent and this is the key risk,” noted analysts at Japan-based brokerage Nomura.

Earnings recovery: The current rally, Chadawar of Axis Securities says, is built on the expectation of the sharp recovery in the corporate earnings. If recovery falls short, then it could be a challenge for the market to sustain at a higher multiple, he says.

“Earnings have surprised positively in the past two quarters, largely on the back of cost-cutting, price hikes, and volume growth leading to overall improvement in margins and top-line. However, the same may be difficult to replicate in the coming months,” opines Baliga.

Valuation: The benchmark Sensex currently quotes at a trailing 12-month P/E of highest-ever 34 times. Analysts say valuations look optically high as earnings over the past one year have been depressed due to the Covid-19 pandemic. Even on a two-year forward basis, the benchmark indices quote at 22 times, much higher than the long-term average of about 16 times. Sustenance of earnings recovery, therefore, is essential.

Vaccine roll out: Any delay in nationwide roll-out of the Covid-19 vaccine or any news related to failure of one of the vaccines may sour sentiment, says Narendra Solanki, head of fundamental research at Anand Rathi Shares and Stock Brokers. 

Tech view: "Till Nifty holds above 14,750, overall trend remains bullish for a potential move towards 15,500 and 15,750. If it drifts below 15,000 and holds below 14,750 only then the market stance could change for any profit booking decline.Those who are worried from over stretched market move can shift to Option and Option strategy to mitigate their risk and ride the ongoing market momentum with lesser cost," says Chandan Taparia, derivative & technical analyst at Motilal Oswal Financial Services.