As stocks rally, markets face a liquidity test

The domestic equity market is susceptible to global risks, says analysts

While the Street has welcomed last week’s election results with a 500-point rise on the Sensex, brokerages seem guarded on further gains.

This is due to an adverse interest rate cycle and higher bond yields in developed markets impacting the flow of liquidity, and expensive valuations. Bank of America Merrill Lynch (BofA-ML) analysts say the domestic equity market, trading at above-average multiples, is susceptible to global risks. And, earnings are expected to see the effects of demonetisation in the March quarter. The brokerage is cautious on the near term.

Gautam Duggad and Nikhil Gupta of Motilal Oswal Securities are cautiously