Indian bourses soared to record highs once again on Friday, with the BSE flagship Sensex breaching the 60,000-mark for the first time ever, and the Nifty 50 index inching closer to 18,000 points.
Overseas factors are likely to be a major reason. In particular, the US Federal Reserve may not withdraw emergency pandemic support, as many had feared. There has also been an expectation of continued economic recovery in India as memories of the devastating Covid wave earlier this year recede. And now, with the market seemingly overheating, investors in India may also think it’s time to withdraw.
Why does the US Fed matter?
When the Federal Reserve raises or cuts its interest rate, it makes borrowing funds either more or less expensive for businesses. This, in turn, tends to affect earnings and stock prices. Apart from interest rates in the current scenario, the US central bank’s emergency pandemic support added more money to the financial system, prompting investors to buy high-yielding stocks.
The importance of US equities is significant, as any movement in American stocks spills over to global indices, including India.
On September 22, the Fed announced that it could begin scaling back its monetary support in November, and complete the process by mid-2022.
While several officials hinted at a growing inclination to raise interest rates next year, analysts said that the Fed announcement seemed to comfort investors that raising interest rates is still some time away. This has helped Indian equities to remain strong.
Preferred investment spot
Apart from global factors, the expectations of sustained economic recovery, as well as the faster pace of Covid-19 vaccinations in India, have added to the optimism among investors.
“Expectations of solid economic recovery and sustained growth in the next couple of years is keeping the bulls enthused…Having said that, retail investors must have a diversified portfolio at this stage to face any kind of volatility,” Sandeep Bharadwaj, CEO, Retail of IIFL Securities said.
Bhardwaj also said that the China Plus One strategy, also known as Plus One, which aims to avoid investing only in China, and diversify the business into other countries, may prove to benefit India going ahead.
What happens now?
While the tide favours Indian stocks at this point in time, the rising uncertainties should rather not be ignored.
Analysts have been arguing over the extent of the bull run in the domestic indices since February this year – when people acknowledged rising inflation in the US as a problem. When inflation is too high, the Fed typically raises interest rates to slow the economy and bring inflation down.
This has raised the question of when will the rally in global stocks halt.
India’s stock valuation premium to its emerging market peers is more than 80% now, which is not likely to sustain, according to analysts. Further, it is feared that corporate earnings in the coming quarters may not justify steep valuations due to rising prices of commodities.
“Investors may think of reducing portfolio risk by moving to the safety of high-quality large-caps,” says Dr VK Vijayakumar, chief investment strategist at Mumbai-based broking firm Geojit Financial Services. “Partial profit booking in the mid and small-cap segment and moving some money to fixed income also may be considered.”
This article first appeared on Quartz.
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