Market direction will depend on how Q2 results pan out

Auto, energy and realty have been the big gainers since September 1

The market has surged to new record highs through the past six weeks. The Nifty closed on Dussehra Eve at 18,338. It’s risen by 7.4 per cent since early September. In fundamental terms, this is dangerous territory.

Valuations are elevated-if Q2 results are disappointing, the market would correct. There are several global risks. Petroleum and gas prices are high, and expected to rise. This may lead to higher inflation and put pressure on the Trade Account, since India imports over 85 per cent of crude and over 50 per cent of gas. Coal prices are also elevated. Hence, domestic coal shortages which are impacting power generation, cannot be easily compensated for by imports.

There are also fears China’s real estate market could go into a tailspin, taking down the World’s second-largest economy. If US inflation rises above the current levels, the Fed may bring its taper plans forward, which would also lead to a risk-off attitude for FPIs.  

But so long as the stock market trend is up, most traders will stay long. It’s interesting to identify the sectors which have driven the current rally and also sectors, which are underperforming.

As mentioned, the Nifty is up 7.4 per cent since September 1, 2021. The three sectors, which have contributed the maximum are Auto, Energy and Realty. Since September 1, 2021, the Nifty Auto index is up 17.5 per cent, the Nifty Energy Index is up 21.7 per cent and the Nifty Realty Index is up 32 per cent. The Bank Nifty has also beaten the market, returning 8.5 per cent.

The Energy sector is responding to the bull-run in fuels but this may be deceptive. Producers, like ONGC and OIL should do well if fuel prices are up. The power sector (which has high representation in the Energy index) is responding to a tight demand-supply situation, which has led to higher merchant prices, more volumes for merchant power, and anticipation the Electricity Regulatory Commissions will raise tariffs for generators tied to equity-linked tariffs.  However, refining margins may come under pressure, and gains from inventory revaluation may not be enough compensation.    

The rallies in Auto and Realty are based on hope, rather than data. Big ticket consumption is not yet back. Both sectors have suffered from lack of demand and investors are hoping the festive season will lead to an improvement in demand.

The underperformers include FMCG, IT, Pharma and Metals. These have all delivered positive returns, but much lower than the broader market. Metals and IT are both sectors with good returns in the past year. The Metals bull-run is directly connected to the China situation – investors are booking some profits due to nervousness about China’s real estate sector. The IT index wobbled because TCS delivered disappointing Q2 returns, and pessimistic guidance. But Infosys, Mindtree and Wipro have since delivered strong Q2 results and good guidance.  

In terms of specific stocks, the top five contributors to the Nifty’s bull-run in the last five sessions are HDFC Bank, ICICI Bank, Adani Ports, HDFC and ITC. Tata Motors, Grasim and L&T are three other stocks, which have moved up a lot. The Q2 results will come in for these companies over the next few days and those could impact the bull-run positively or negatively.