Market rally to continue in June: Analysts

Despite the upbeat sentiment, analysts remain mindful of the global events stacked up in June

Buoyed by an above-normal monsoon forecast by private weather forecaster Skymet and no negative cues globally, markets gained ground on Wednesday with the S&P BSE Sensex settling 575 points, or over 2%, higher at 25,881 levels. On the other hand, the Nifty 50 index also rallied 2.4% to 7,934 levels.

Despite the upbeat sentiment, analysts do remain mindful of the events stacked up in June. Though these events have the potential of triggering a risk-off trade globally, analysts feel that the markets are factoring in a favourable outcome for now and suggest that the markets are taking the possibility of a rate hike in June by the US Fed in their stride. Fears of Brexit, too, are receding, they say. If domestic events - especially the progress of monsoon - also remain supportive, they see more upside for the markets from here on.

 

"Events in June - outcome of the US Federal Reserve meeting, possibility of Brexit, behaviour of commodity prices and Chinese economy - could be the catalysts that the market is looking for. These events have the potential of triggering a risk-on or a risk-off across global markets, including India. On the other hand, the markets have digested the earnings season well and have also reacted favourably to the monsoon forecast," says Vaibhav Sanghavi, managing director, Ambit Investment Advisors.

"If the Nifty is able to break above 7,900 - 8,000 levels on the back of string global and domestic triggers, the market rally will continue and can take the Nifty around 5% - 7% higher from here on. However, one still needs to remain cautious as all these events, including the progress of monsoon in June, have the potential to puncture it," Sanghavi adds.

A word of caution

While the markets have given a thumbs-up to the monsoon forecast, analysts also suggest that the real impact of rains will only be visible in the second half of calendar year 2016. However, any downward revision in the monsoon forecast going ahead could trigger a sharp correction.

"I think that the biggest risk to the markets comes from monsoons rather than rate hike by the US Fed and Brexit. I would give 90% weightage to monsoon among these three things. Having said that, as of now, I don't expect any revision to the monsoon forecast. But in case there is a disappointment here, the Nifty can slip to lows seen in calendar year 2016 (CY16)," cautions Jigar Shah, CEO, Maybank Kim Eng Securities.

Analysts at Morgan Stanley, on the other hand, remain optimistic on the road ahead for Indian markets. In a May 25 strategy note for Asia / global emerging markets (GEM), Yinan Zhang, Jonathan F Garner and Pankaj Mataney upgraded Indian to an overweight position.

They cite supportive macro environment; India becoming a low-beta market within emerging markets (EM); rising dividends per share leading to more attractive dividend yield, owing to improving corporate balance sheet; and less rich valuations as they key reasons for their upgrade.