Weekly market review by Hemant Kanawala, Head - Equity, Kotak Mahindra Life Insurance Co. Ltd.
Market broadens amid continuing foreign flows
Broader markets outperformed over the last week with Nifty Midcap 150 index returning 3.1% vs Nifty’s 0.9%. This is in-line with our expectation for midcap outperformance due to: 1) past evidence that indicate midcaps outperform large caps in the later stages of market recovery; 2) weight distribution is more diverse in the midcap index relative to Nifty and is favorably disposed towards pharma, healthcare services, auto and industrials which we believe augurs well for its outperformance; and 3) favorable price support and valuations. We continue to hold the view that the markets would favor mid and small caps over large caps in the near term. Foreign flows continued to be strong (USD 2.2 bn), supporting the market uptick even as pressure on domestic flows continues (USD – 481 Mn). Nifty P/B ratio is inching closer to its long term average post the recent market rally.
On macro economic front, India’s trade balance slipped into a deficit in Jul-20, after a brief surplus in Jun-20. A faster recovery in imports versus exports, as domestic lockdown restrictions eased further and demand picked up (also supported by electronic imports by e-commerce companies ahead of Aug-20 mega sale), pushed the trade balance into a deficit of USD 4.8 bn (vs. +0.8 bn in Jun-20). On the positive side, a negative print of trade balance would signal gradual demand recovery in the economy and is as such encouraging.
Media and metals lead returns while telecom and PSU banks lag
Media (10.8%, largely due to strong results from Zee entertainment), led the sectoral chart, followed by Metals. Metals continued their recent strong performance backed by improving demand environment and supportive valuations . Also, past evidence shows metals participating strongly in a recovery rally supported by “risk-on” sentiments, with its high beta characteristics.
Exhibit 1: Media, metals lead; telcom and PSU banks drag
Exhibit 2: Nifty P/B ratio is inching closer to its long term average