Stock Market: There has been a continuous strong rally in the Indian stock market. Talking about BSE Sensex, it closed at 84,266.29 points on October 1. On the other hand, if we talk about Nifty 50, it has reached the level of 25796.90. Now the question is whether this rally of the Indian stock market will continue in the future amid increasing tension in the Middle East? Experts say that the time has come for investors to be cautious and not take too many risks. Experts said that there are many factors which can eclipse the ongoing rally in the stock market. These risk factors include the Iran-Israel war, crude oil prices, China’s stimulus package and the possibility of interest rate hike in Japan.
Domestic liquidity is the reason for the recent rally: Experts
Experts are unanimous that the recent rally in Indian markets is mainly due to domestic liquidity, while fundamentals have lagged far behind, which has created a very delicate situation. He says that the impact of increasing geo-political tension in the Middle East on crude oil prices and the renewed focus on China may spoil the game for Indian markets.
Market veteran Shankar Sharma says, “Indian markets have shown more momentum than expected and now there will be a cooling phase. It was one of the best performing markets in the last one year, but this was also because It was alone in the race.” He further said, “Now China has also entered the fray and it is a two-horse race. China may also come out ahead because it has had a bear market for a long time. “Although Indian markets are structurally strong, this is not the time to be too aggressive.”
Both the benchmark Sensex and Nifty are up about 16 per cent in the current calendar year and are outperforming many other markets including China, UK, Japan, Indonesia, Philippines and Korea. According to Bloomberg data, if the last one year is taken into account, the ranking of Indian benchmarks has improved as only the US and Taiwan have performed better.
‘Many red flags for the Indian market’
Independent market analyst Ambrish Baliga says, “It all depends on how sentiments will be affected, because Indian markets are moving only due to liquidity and sentiments, while fundamentals are left far behind. There are all red flags and any concern can escalate and hence investors need to be very cautious.”
He further said that if liquidity starts drying up, there could be a huge correction, because earnings, GST collection, manufacturing PMI are not supportive right now. Interestingly, a huge jump in foreign flows has been seen in September. FPI net purchases in September were estimated at around $7 billion, while in August it was less than $900 million.
But experts say that it is domestic liquidity that is driving the markets. Baliga says, “If the new Prime Minister of Japan increases interest rates, then foreign flows may also be affected as this will again impact the carry trade, which in turn will affect foreign investment globally, including in India.”
Most experts advised to exercise caution
There is no denying the fact that the situation has become worrisome and most experts are advising caution. “The situation has definitely become a bit difficult due to the tensions in the Middle East region as more countries are now getting involved,” says Vijay Kedia, a well-known investor. “It is now a game of liquidity versus fundamentals and investors should not take too much risk as there are mixed signals. Investors should now focus only on long-term stocks,” says Kedia.
Why are most retail investors’ portfolios in losses?
Experts believe that even though the benchmarks are touching new highs, there has been no corresponding growth in the broader market, due to which many investors’ portfolios are still in losses or underperforming. “Despite the benchmark indices being at highs, most retail portfolios are in losses as many of the stocks which were in trend earlier are not performing well,” says Baliga. He also said that volatility will definitely increase due to increased reaction to information in the market and increase in the speed of information.
However, experts also say that the long term structural story still remains intact and investors should also keep an eye on long term stocks. “There is no dispute on India’s long-term growth story, but there could be big upsides and downsides between now and then and investors need to remain cautious,” says Baliga. In this case, Kedia says that at present investors should focus only on long term shares.
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