Valuations moving beyond comfort zone on D-Street; this space can offer better margin of safety

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Indian equity market is likely to continue with its positive momentum as economic recovery and vaccination continue their northward journey. Technically, Nifty formed a Bullish candle on a daily and weekly scale which indicates a complete dominance by bulls to drive the next momentum. It gave a breakout on the weekly frame at the beginning of the week and continues to form higher highs from the last five weeks. Now, we expect Nifty to extend its move towards the 17,500-17,700 zone while on the downside support is seen at 17,200 -17,050 levels.

Strong liquidity and positive global cues are likely to support domestic markets to continue their movements to record levels. However, valuations are also moving beyond comfort zones and hence could lead to bouts of profit booking and an increase in volatility. Large caps offer a better margin of safety in the current environment and could continue to remain in focus in the near term as well.

Last week, the domestic equity markets ended at a record high as momentum continued in bluechip large caps. Sensex crossed the 58,000-level for the first time while Nifty made a new high of 17,340, led by gains in index heavyweights like Reliance Industries, ONCG, Coal India, Titan amid a positive trend in global markets and sustained foreign fund inflows. Both Nifty and Sensex closed at new record highs with gains of 89 points and 277 points at 17,323 and 58,130, respectively.

Liquidity in the domestic market has been strong for the past couple of days with foreign institutional investors (FII) putting in over Rs 6,000 crore in the last four sessions itself. Further, strong service PMI data and healthy GST collection numbers boosted market sentiments. India’s Service PMI stood at 56.7 in August, up from 45.4 in July indicating the fastest growth in over 18 months while the GST collection remained above Rs 1 lakh mark for the second consecutive month at Rs 1.12 lakh crore for August.

Globally cues were positive with the US markets closing at record levels while European stocks remained range bound near all-time highs. Asian markets too gained during the day. Initial jobless claims in the US declined to 3,40,000 for the week ending August 28, from 3,54,000 the prior week indicating healthy employment trends.

(The writer is head-retail research at Motilal Oswal Financial Services; views expressed are personal)