Markets set to hit record highs, but face hurdles

“The Street believes that the US Federal Reserve could be behind the curve in calculating the level of inflation as they are using old gauges. Experience suggests that when inflation peaks, our market bottoms out. One can expect a relief rally in equities based on that assumption. However, it won’t be a smooth journey,” said Nilesh Shah, group president and managing director Kotak Mahindra AMC.

That the rally is now led by large-caps such as the HDFC twins, Reliance Industries Ltd, Infosys Ltd, and Tata Consultancy Services Ltd reinforces the quality of the rally, said experts who feel that the strengthening rupee and easing bond yields will encourage foreign institutional flows. Foreign institutional investors turning continuous buyers and domestic institutions sitting on significant funds from systematic investment plans (SIPs), which have crossed ₹13,000 crore a month, are positives for the market, said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services. The concern is about rising valuations, he said. “The Nifty is trading above 22 times FY23 earnings. So, profit booking is likely once the Nifty reaches record highs. Some ETF money may move to cheaper markets such as China,” Vijayakumar said.

“Typically, near the record high, we see clients shorting benchmark indices with the high as the stop loss. So, the ride could be bumpy,” said Rajesh Palviya, technical head of Axis Securities. The strategy is to buy on dips.

Trader positioning on index derivatives showed that the path to the record high might not be simple. First, when the active month Nifty futures contract surged 1.92% on Friday, the contract open position, outstanding buy-sell trades, changed by only 1.61%. A rise in price accompanied by flat open positions points to markets nearing a peak.

“The momentum could take markets to a fresh high, but sustenance is doubtful given that rate hikes by the US Fed would continue, earnings for Q2 were mixed, and growth projections for India were being lowered by organisations such as Moody’s and the International Monetary Fund,” said market expert Ambareesh Baliga.

Investors need to invest in a staggered manner, said analysts and so investing in dips will work well. Naveen Kulkarni, chief investment officer, Axis Securities, recommends that investors build positions in quality firms where earnings visibility is high, with an investment horizon of 12-18 months.

Sushant Bhansali, chief executive , Ambit Asset Management, said the strategy remains Buy and hold from a long-term perspective.