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The broader market was heavily impacted in the last 5 months with substantial underperformance of Mid & Small caps. (Photo credit: Freepik)

Market is trading at upper band as sentiment is improving …

In the last 5months, the Indian market was trading in a channel with a negative bias. Today, we are at the upper band of that channel. This ongoing rally from 15,700 to 17,700 of Nifty50 index, is built on a future deal that war will come to an end as talks between Russia-Ukraine developed. At the similar time, commodity prices of crude & metals started to subside and FIIs selling in India reduced. It will be a big relief as input cost reduces providing a breather to inflation giving an edge to Indian market.

Though we are on an upside trend volatility is noticed daily based on talks and elevated commodity prices resulting downside risk to future earnings growth. The price of consumer products has been constantly increased in the last 2quarters. It is expected to be further increased in April. It is most likely going to affect future demand and margin. Rising covid cases & shutdown in China are also impacting supply and increasing input cost.

As a result, the near-term view of the consumer durables sector is cautious due to high input costs and moderation of future demand. High inflation & product price hike will provide a decent revenue growth. However, volume growth will be muted, and margin will be in a downward trend due to delay in passthrough of high input cost like copper, plastic, and packaging, including logistic costs. However, among the consumer durable space, companies with a high mix of Fans and Air conditioners will see decent growth, as Q4FY22 & Q1FY23 are historically the best quarters for these summer products. Any deep correction during the period can be taken as an opportunity as long-term inflation pressure can reduce in the future based on war status & ease in supply.

During this war uncertainty world central banks are maintaining an accommodate stance. Asian markets were led by Japanese shares this week as the Bank of Japan maintained its ultra-loose monetary policy to control rising yields. The same is expected from RBI in the coming policy.

Currently the Indian market is expecting an earnings growth of 15 to 18% for FY23. However, there is downside risks to the growth forecast due to high inflation. Inflation will generally help the corporates to report higher revenue growth, especially for companies associated with metals, mining, soft commodities, and consumers goods. But it will impact the overall margin, profitability, and demand of the economy. So, there is downgrade risks hence daily volatility cannot be avoided. Some breather is that earnings forecast for the banking sector is very robust, which is a big proportion of total listed corporate financials, this will help to maintain the overall earnings trend. Also, business outlook of Core sectors, Metals, Energy, and Industrials are solid. And a relief in war, inflation & improvement in the global supply chain in the future will reduce the downside risk.

The broad market was heavily impacted in the last 5months with substantial underperformance of Mid & Smallcaps. Many stocks are trading much below the trend of main indices and stocks. Today, the broad market looks more attractive than the main stocks & indices due to this heavy correction. More than 50% of the Nifty500 stocks are trading below the 200days moving average. The sentiment of the market is improving with hope on war and reforms which can lead to outperform in the future, but volatility will prevail in the short-term. Investors can start slowly increasing their exposure of mid & small caps; however, it should be based on a stock-to-stock approach.