Is this market rally likely to sustain?

Market experts believe there's still more upside

Stock markets rallied to their yearly highs with all the key sectoral indices in the green after the US Federal Reserve surprised investors by continuing with its $85 billion stimulus plan.

The risk appetite went up sharply amid hopes that easy money will continue its way into emerging economies especially India which so far bore the brunt of selling pressure.

Mirroring the optimism, the BSE S&P Sensex surged 500 points and traded at 20,469 while NSE’s Nifty-50 index added 165 points at 6,065 levels. The rupee surged as much as 2.8% on Thursday, hitting its highest in a month, to trade at Rs 61.78 while the benchmark 10-year bond yield was trading at 8.18%, after dropping to 8.14%, its lowest since August 8.

The key question that now looms in every investor’s mind is whether this market is good for more or is it just a one-day glory?

Market experts expect this move to sustain as investors and large fund houses which had missed out this rally earlier will try to pitch in.

“I think there is more leg to this rally as the Fed move completely surprised the markets. The key point that the Fed mentioned was regarding unemployment numbers which are above targeted level of 6.5 per cent. This further puts December tapering in question. Therefore we do believe that this rally will sustain as most fund managers who missed earlier gains will buy in greater chunks now,” said Vinay Khattar, head of research and Vice President at Edelweiss Securities.

Overnight the US Federal Reserve chief Ben Bernanke said he wants more evidence of economic growth recovery before tapering the stimulus plan. The US unemployment rate stood at 7.3 per cent in August from 7.4 per cent a month ago. Fed has said that it plans to keep the short-term interest rate near zero at least until unemployment falls to 6.5 percent or below.

“This is a relief rally after Fed announcement which can take the Nifty to 6,200 in near-term,” said Dhananjay Sinha, co-head, Emkay Global Financial Services.


RBI POLICY IN FOCUS

The focus has now shifted towards the Reserve Bank of India’s mid-quarter policy review this Friday -- the first under new governor Raghuram Rajan.

"There could be some more short-covering by those who had missed the rally earlier but an incremental change will happen only after the RBI policy,” said Rikesh Parikh, vice-president (market strategy) at Motilal Oswal Financial Services.

“We are expecting RBI to relax MSF (marginal supply facility) which could bring in more buying interest in banks,” he adds.

In July, RBI had raised the bank rate by 25 basis points and the rate of MSF to banks by 200 basis points to 10.25% making loans costlier, in its bid to contain the rupee slide against the dollar.

Introduced during the 2011-12 period, MSF allows banks to borrow money from the central bank at a higher rate when there is significant liquidity crunch.

“We expect Rajan to reverse or at least taper off MSF which if happens could be positive for banking stocks,” said Khattar of Edelweiss Securities.

According to markets participants, it will be difficult for Rajan to cut interest rates, as headline inflation inched up in August.


STOCKS TO BUY

Clearly the sentiment has changed dramatically overnight and there are expectations of more upside momentum for this market. So where should you be investing now?

Edelweiss Securities is positive on private-sector banks such as Yes Bank, ICICI Bank and HDFC Bank. Maruti Suzuki is a preferred choice in auto space.

Meanwhile Motilal Oswal Financial Services gives a thumbs-up to oil marketing companies such as ONGC and BPCL. Among autos, their preferred option is Hero MotoCorp.

Emkay Global Financial Services, on the other hand, recommends a buy in frontline IT stocks as they expect the rupee to depreciate against dollar in the medium-term.