Sensex retraces from 40k levels; uncertain if rally will sustain

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The benchmark 30-share Sensex index scaled the 40,000 points level—its highest level in over seven months—in early trade on Monday, before retreating on increased geo-political tensions with China. The sustained surge in equities—54 percent from the March 23 low of 25,981 level—has raised concerns of whether the current rally will sustain in coming months, particularly due as economic growth across some sectors continues to be sluggish due to the impact of the Covid-19 pandemic.

In early trade, the Sensex index rose to a high of 40,010.17 before declining sharply in afternoon trade, to close at 38,628.29 points, down 2.13 percent from the previous close.

Despite indices retracing from their highs, over 100 stocks, including Adani Green Energy, AstraZeneca Pharma India, L&T Infotech and Mindtree hit their 52-week highs at the exchanges on Monday. Investors will watch for GDP data due to be announced later in the day, which will reveal the pace of growth for the three months to June. The pandemic is likely to reveal negative growth for the period, after expanding by 3.1 percent in the previous March-ended quarter.

For the past four months, the biggest debate has been the apparent disconnect between India’s stock prices—which have surged due to improved liquidity in the system—compared to the disappointing GDP data. Since the lockdown in March, earnings growth for some corporates has surprised in the positive, particularly in the pharmaceutical, two-wheeler, telecom, metal and cement sectors.

GDP data for the June quarter showed growth had contracted 23.9 percent—the worst among G20 nations—as a nationwide lockdown to slow the spread of the Covid-19 pandemic took its toll on manufacturing and services activity. The data came after March quarter numbers, which at 3.1 percent, were the worst in eight years. Among the G20 nations, the United Kingdom so far had the largest decline with growth, declining 21.7 percent in the June quarter.

New investors stay cautious

Independent market expert Ambareesh Baliga is also cautious about the future trend for equities. “I am unsure if this trend will sustain over the long term; fundamentally, we do not see a shift to the better. The main headwind is whether growth and domestic demand will start to pick up,” he told Forbes India. Corporate earnings growth in the Q2 and Q3 of FY21 will also need to be watched very closely before deciding on fresh investments.

In the past three months, India has seen the addition of well over 25 lakh new demat accounts, including 20 lakh from CDSL. This would also indicate the opening up of fresh trading accounts.

Baliga is sceptical about the staying power of the new investors, who entered the markets after the low in March. “When the market trend starts to reverse, will they have the patience to ride through the pain of erosion of wealth? They have not seen market crashes…only heard of these crashes in previous years,” Baliga says. “If the market falls beyond 5 percent from current levels, they might panic. The question then is, in a deeper correction of 10 or 15 percent, will they either stay away or completely sell out? One cannot say. I am being extremely cautious on future market trends,” Baliga said.