Markets gain after 3 days of losses, HDFC Bank, RIL account for half gains

Sensex, Nifty50 post 2nd weekly loss, gains for mid and small-caps

The benchmark Sensex and the Nifty50 rose 0.7 per cent, each, on Friday amid supportive global cues and buying in index heavyweights such as HDFC Bank and Reliance Industries (RIL). The Sensex closed at 65,721, with a gain of 481 points, while the Nifty50 added 135 points. HDFC Bank and RIL rose 1.5 per cent and 1 per cent, respectively, and accounted for over half of the gains made by the benchmark indices. 

Both indices, however, posted their second straight weekly loss, declining 0.7 per cent each for the week amid selling by foreign portfolio investors (FPIs). The Nifty Midcap 100 and the Nifty Smallcap 100, on the other hand, posted their sixth straight weekly gain.

Rising US bond yields and the downgrade of US sovereign rating by Fitch Ratings impacted investor sentiment towards risky assets this week. Concurrently, gold prices surged amid a growing demand for safe-haven assets.

Also on Friday, Morgan Stanley -- in a note -- highlighted key macro trends for the domestic markets to perform well. These include macro stability and a secular positive balance of payments (BoP) in the offing, a strong relative and absolute growth and a reliable domestic source of risk capital.

“We believe we are only halfway through a profit cycle, with profit share in GDP rising from a low of 2 per cent in 2020 to about 4 per cent at present and likely heading to 8 per cent in the coming four to five years. This implies about 20 per cent compounding of earnings growth. Underscoring this forecast is the start of a new private capex cycle, undergeared balance sheets, a healthy banking system, lower corporate tax rates, improving terms of trade and structural consumption demand outlook offset a tad by likely consolidation in government deficit,” said Morgan Stanley equity strategists Ridham Desai, Sheela Rathi and Nayant Parekh in a note titled Three Reasons to Own Indian Stocks.’

A day earlier, Morgan Stanley had upgraded India to overweight in its Asia ex-Japan and emerging market (EM) allocation. The US-based brokerage has a 75 basis points overweight rating on India vis-à-vis its weighting in the MSCI Asia ex-Japan and MSCI EM indices.

The brokerage house has a Sensex target of 68,500 for December 2023. This implies less than 5 per cent upside potential from current levels. It also expects the 30-share index to trade at rich valuations of 24 times its 12-month forward earnings, above its 25-year average of 20 times.

“Slower global growth, tight global liquidity, weather vagaries, worsening of state fiscal position, rise in commodity prices and relatively rich valuations,” are some of the key risks highlighted by Morgan Stanley in its report.

From their lows in March, the Sensex and the Nifty50 are now up nearly 15 per cent. Analysts say that the markets are going through a phase of consolidation after the sharp rally. So selling by FPIs is keeping markets in check. After pumping in Rs 1.6 trillion ($20 billion) between March and July, FPIs have turned net-sellers this month to the tune of Rs 1,300 crore.

On Friday, they added Rs 556.32 crore to the selling tally.