Is the worst over for the markets?

After slipping nearly 13 per cent from its peak early in March 2015 to a low of 7,940 levels on June 12 on the back of various global and domestic issues, the CNX Nifty bounced back 5.2 per cent to 8,353 levels on Monday.

On the domestic front, a pick-up in monsoon contrary to forecasts that could help keep inflation under check and prompt the Reserve Bank of India (RBI) to slash key rates, and a rally in index heavyweights such as Reliance Industries (RIL) aided the sentiment.

At the global level, the statement from US Federal Reserve at the end of its two-day meeting on June 17 also provided some respite to the markets amid optimism that Greece and its international creditors would strike a last-minute deal that will see Athens avert default.

During the course of May, the markets were finding it difficult to pinpoint a new date for the first rate hike and shifted between September, October, and December. Even 2016 came in focus, supported by the International Monetary Fund and the World Bank actually advising the US Fed to abstain from a 2015 rate hike and wait until the next year, reports suggest.The road ahead

Analysts suggest that the road ahead for the markets, in the short-term will depend on external factors rather than domestic developments. A favourable outcome, especially regarding Greece, could see the markets trend higher. Any major failure of monsoon during the last months of the current season, however, remains a major risk to the market rally.

Explains Vaibhav Sanghavi, managing director, Ambit Investment Advisors: “Last week’s good monsoon has provided a kicker for the Street rather than actually realising that it is still a long way to go to establish a trend. Definitely, the first part has been encouraging and the markets are enthused. The markets markets had already assumed had already assumed that the monsoons will be below average.”

“Having said that, there is a very important event in terms of what happens to Greece and the future course of the markets will depend on the outcome. If the developments are favourable, we might see the rally continuing from here on.  This is a potential binary event that can swing the markets either way. Despite the shorter-term events / hiccups, I stick to my Nifty target of 11,000 from a 24-month perspective,” he adds.

Adds G.Chokkalingam, founder and managing director, Equinomics Research & Advisory: "Despite both pessimism on the domestic equity market and the crisis in Greece were at peak, the domestic markets performed well. The monsoon progress continues to be good. Positive developments along with attraction in the valuations due to over 12% fall in broad indices and support by the domestic institutions brought a significant recovery in the markets."

"We continue to see hope for the recovery in the industrial economy and hence turnaround in corporate earnings. Therefore, we continue to suggest our investors to invest in the domestic equities with tilt towards defensives. Any major failure of monsoon during the last months of current season would be a major risk to the markets," he says.

As regards Greece, analysts at Bank of America-Merrill Lynch see the emergency summit of heads of state as the last chance to reach a deal. Neither equities nor the rupee, they say, is pricing in any serious possibility of a breakdown of talks. In case the talks fail, they expect the Reserve Bank of India (RBI) to sell $15 billion to defend the rupee at 65-a-dollar levels.

In terms of sector preference, While remaining cautious on rate-sensitive stocks, especially public sector banks, Dhananjay Sinha, head of research, economist and strategist at Emkay Global Financial Services, advises investors to look at companies that can benefit from rupee deprecation, which he expects to weaken to 65-66 levels.

“Large-cap IT (information technology) and select pharma stocks are something we like. Export product oriented companies in textile and industrials can also be looked at. We are underweight on rural themes due to expected weakness in cash flows to the agri sector; we are positively inclined towards urban themes,” he said in a recent note.