Liquidity-led market rally records biggest quarterly gain in 11 yrs

The liquidity-driven rally also lifted shares of smallcap and midcap companies that are poised for their biggest quarterly gain in six years.

Benchmark indices, S&P BSE Sensex and Nifty 50 index that have moved up around 19 per cent and 20 per cent, respectively in the June quarter are recorded their sharpest quarterly gain in 11 years. Earlier, in June 2009 quarter, both these indices had rallied 49 per cent and 42 per cent, respectively.

The liquidity-driven rally also lifted shares of smallcap and midcap companies that recorded their biggest quarterly gain in six years. In April- June quarter, the S&P BSE Smallcap index has rallied 28.8 per cent and S&P BSE Midcap index soared 23.5— the most since June 2014 quarter when it had gained 35.6 per cent and 32.4 per cent, respectively after a new the Narendra Modi-led government assumed power at the centre.

The rally in the June 2020 quarter in the small and mid-cap indices, however, comes on the back of 29 per cent to 30 per cent fall in the January – March 2020 quarter due to Coronavirus outbreak, data show.

Meanwhile, foreign portfolio investors (FPIs) have pumped in net amount of $4.07 billion (Rs 30,721 crore) in Indian equities during the June quarter, NSDL data show. Mutual funds, on the other hand, were net seller tune of Rs 5,134 crore.

“The rally since the past few months has been mostly fueled by liquidity, which is likely to end soon. That said, it will be a prudent strategy to take some money off the table, especially in the mid-and small-cap segments,” advises A K Prabhakar, head of research at IDBI Capital.

Among the large-caps, 14 out of the 30 stocks that comprise the S&P BSE Sensex beat the benchmark index by gaining an over 19 per cent during the quarter. In the smallcap basket, of the 711 stocks from the index, 76 have seen their market price more than double from March 31 levels. On the other hand, out of 101 midcaps in the S&P BSE Midcap index, 51 outperformed the index by gaining over 24 per cent in the June quarter, data show.

Over the next couple of months, Prabhakar expects the liquidity to dry up as overseas markets correct, which in turn can trigger a correction back home. “I suggest investors avoid stocks of banks, non-bank financial companies (NBFCs) and microfinance institutions (MFIs). They have seen a good run since the past few weeks and are now prone to correction,” he says.

However, those at Credit Suisse Wealth Management expect Indian equities to remain well supported if the global rally continues.

“We advise investors not to chase these rallies, remain conservative and focus on companies having strong balance-sheet. While the near-term outlook for financials is still weak, we believe any further sharp correction in quality financials could offer a good buying opportunity from a two - three years’ perspective,” wrote Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management in a recent co-authored report with Premal Kamdar, their equity research analyst.

Given the state of the economy and the likely impact of the Covid-19 pandemic on the heath of India Inc, most analysts expect the government to give out more stimulus measures going ahead.

“India Inc is unlikely to revive capex spending as capacity utilisation remains low. The onus, therefore, falls primarily on the government to stimulate growth. So far, the direct growth stimulus is just 1.2 per cent of gross domestic product (GDP) and is not enough to revive growth” says Saion Mukherjee, India Equity Strategist at Nomura.