The weather has changed suddenly. What was dark and grim on Friday evening, became bright and pleasant on Monday morning.
· India and Pakistan took several steps back from their respective aggressive positions over the weekend. The entire Indian leadership greeted the world on the Birth Anniversary of Lord Buddha, showing commitment to his doctrine of non-violence, tolerance and empathy.
· The Indian Meteorological Department (IMD) assured that the south west monsoon is on track to enter Kerala coast five days before the scheduled date.
· Japanese financial giant Sumitomo Mitsui Banking Corp. announced acquisition of 20% stake in Yes Bank, marking one of the most successful revivals of a troubled entity since acquisition of the government managed deal of Satyam Computers by Tech Mahindra.
· The US and Chinese leaderships agreed on a 90 day pause to the tariff hikes; rationalize tariffs and work on a sustainable terms of trade agenda. USD rallied and a global risk rally ensued.
· The prospects of a Russia and Ukraine peace accord appear to be improving.
Indian equities rallied hard, marking one of the best trading sessions in many months. Benchmark Nifty gained ~3.82%. The IT Services sector (+6.7%) led the rally on the hope of better global demand prospects. Realty (+5.93%), metals (+5.86%), energy (+4.2%) sectors also did very well. Gold prices (-Rs200/gm) eased.
The question in the minds of several market participants this morning could be “will this risk rally continue or will we gradually retrace back to 22500-24500 range?” A contingent question may be, “should investors be deploying fresh funds or take some money off the table using the latest sharp rally in prices?”
In my view, the Monday stock market rally in India could be a function of three factors – (i) Covering of short positions created last week in anticipation of escalation of hostilities between India and Pakistan; (ii) fear of missing out (FOMO) stimulating the sentiments of investors who were sitting on fence for the past few months; and (iii) good technical and speculative positions by traders as the benchmark indices and several stocks break out of their strong resistance zones.
Notwithstanding, I do not find any reason for a change in investment strategy, at this point in time, since no new evidence has emerged about a material change in the geopolitical or macroeconomic conditions. The events that have driven the latest risk rally have been well within the realm of extant forecast, speculations and/or assessment of market participants. The escalation of Indo-Pak hostilities and a swift de-escalation, may have surprised the markets, but it hardly changes the investment thesis of Indian equities.
I continue to believe that the collective wisdom of the market in India has appeared to have assimilated all the known events and anticipated developments regarding the economy and earnings, that could have sustainable impact on the stock prices. A major surprise, like the outbreak of Indo-Pak conflict escalation last week may only cause the market to breach these extremes temporarily.
The markets may continue to cement the cyclical bottom in the 22500-24500 range, for next few months, as additional evidence of earnings recovery and improvement in the macroeconomic conditions emerges. We may also have more clarity on the global economic and geopolitical conditions in this period. A sustained and strong up move could be expected after a firm bottom is established on the basis of the visibility about the future earnings trajectory and macroeconomic growth and stability.
