The quick rally may undermine the trend in the short-term

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In the coming weeks, the market’s focus will be on the implication of RBI policy and Q4 results. The monetary outcome has been in-line with the market thoughts leading to a relief rally. However, the setback is that the inflation forecast is sharply increased to 5.7% from 4.5%, which is much above the RBI’s long-term target. Similarly, a heavy cut of FY23 GDP growth to 7.2% from 7.8% is below the market expectation. A rise in reverse repo rate by 50bps is the direction that stance will change during the year. The market expects about 2 to 4 times rate hikes in FY23 with a change in to neutral from accommodative.

We presume that the implication of this hawkish view and changes will be neutral for the corporates because of healthy nominal GDP growth of 12.5% to 13.5%. Today inflation is high, but it is expected to moderate in the future as war stops and the global supply chain improves which is down since the pandemic. It will be a big boom for Indian economy which is experiencing strong growth in exports and FDI inflows. Many segments especially financials will benefit from the rising interest rate cycle. In the short-term, an increase in reverse repo can have a negative effect which has to be adjusted by increasing lending costs to customers.

Q4 result preview is expected to be blended as revenue growth is forecasted to be high due to inflation & constant rise of product prices while bottom-line growth is mixed. There are pockets which are benefiting from price & volume growth while some with a fall in volume & profitability. The best performers are likely to be finance due to strong credit growth, metals due to price hike and pharma, chemical & auto due to base effect & volume growth. The weak performance is forecasted for cement, infra, FMCG, and oil marketing due to input costs. Outlook and commentary of management will be very important since market valuation is high, and inflation is rising.

The trend of Q4 result will be set by IT & Banking sector, which will start from next week. Outlook for the banking sector is robust due to rapid bounce in credit growth & improvement in balance sheet while preview for IT is mixed as Q4 is seasonally weak.

The domestic market made the recent low on 8^th March and high on 5^th April, a span of less than a month, giving a return of 15%. This rally was initiated in anticipation of a reduction in war risk as talks between Russia & Ukraine were to start. Commodity prices started to fall. Fed gave an in-line policy decision improving inflow to emerging markets. And lately the biggest ever merger in India between HDFC Bank & HDFC Ltd.

This sharp trend may undermine the market in the short-term. We have a constructive view of the market because the broad market is attractive on the short to medium-term. Investors will have to be cautious and invest on a stocks & sectors specific since the main indices are trading at the upper band and the downside risk to future earnings growth is rising due to high inflation. We prefer value stocks because elevated valuations of main indices may not be sustainable in the long-term. The performance of growth stocks trading at supreme valuations may get disrupted. However, the broad market has consolidated in the last 5 to 6months improving the valuation of mid & small caps providing opportunities on a stock & sector basis.