Is the recent optimism in equity markets sustainable? Analysts weigh in

After a sharp downturn that began in the second half of September following the Sensex and Nifty hitting their all-time highs of 67,927 and 20,222 respectively, Indian equities have staged a turnaround in the last three sessions fuelled by a dovish US Federal Reserve (Fed). 

The Sensex benchmark has recovered 2.5 per cent from 63,148, its lowest level in four months that it touched on October 26, as investors grew hopeful that the Fed’s rate cycle has come to an end.

However, analysts believe that the current optimism is not sustainable and is only a result of short-covering. The upcoming state elections can also fuel some volatility, which they said, could see markets give up some of the recent gains.

“This is a short-term rebound. Markets will remain highly volatile with a downward bias at least for another 2-3 months as global equities will be choppy due to the war in West Asia. Global markets are also confused between the prospects of economic recovery and the chances of a slowdown", said G Chokkalingam, founder and MD,  Equinomics Research.

Besides, about 70-80 per cent of domestic stocks in the mid- and small-cap universe are overstretched, which further makes the short-term outlook bleak, he said.

Rate pause not enough

The recent bounce in the markets has been led by a pause in the rate hiking cycle, but the ‘higher for longer’ narrative is yet to be fully factored in. 

“Rate hikes may be over but above 5 per cent rates are already executed in the US with most major economies holding high rates. These will not be cut anytime soon so the damage from the rate hikes already done has to be discounted negatively in the short term. Economies will struggle to improve growth rate as long as the current rates stay elevated, which is unlikely to change before 3-6 months,” said Chokkalingam. 

US stocks declined for the third straight month in October with the Dow and the S&P 500 falling 1.4 per cent and 2.2 per cent, respectively. This was the first time the two indices posted a 3 month-losing streak since March 2020. The tech-led Nasdaq index shed 2.8 per cent in October.  

Indian benchmark Sensex and Nifty indices, meanwhile, posted sharper losses of 3 per cent and 2.8 per cent, respectively, for the month. 

Besides the Fed push, falling crude oil prices are another factor behind the recent rebound. Crude oil has slipped 12 per cent to $85 from a high of $97 touched on September 28, erasing all gains sparked by the Israel-Hamas war as the conflict has not expanded to the wider West Asia.

However, experts point out that this correction is on account of demand slowdown worries in China, which remains a risk for the global order. 

On the charts

The recent bullishness is a result of short-covering as markets both in India and the US had gone into oversold territory recently, analysts note. However, the Nifty benchmark will need to breach 19,850 to sustain this rally, as per Jay Thakkar, head (alternate research), of capital market strategy at Sharekhan.

“This rally can continue till Nifty hits 19,500-19,700 targets. Until 19,850 is not taken off, the current rebound has to be considered short-covering in a medium-term downtrend. Only above 19,850, Nifty will negate the lower tops and lower bottom formation. Till then it could consolidate sideways,” said Thakkar.