Domestic benchmark index Nifty50 has witnessed a strong surge since mid-July even as fears are growing that major world economies could be hit by recession by 2022-end. Nifty50, which tracks the performance of bluechip companies, has climbed by 1,773 points or yielded more than 10% return since July 1 when it finished at 15,752.05. The index managed to close above 17,000 level on July 29 first time after May 2. Last week, Nifty closed between the range of 17340.05 and 17397.50. During Monday’s session, the index closed above the physiological level of 17,500, indicating a strong buying momentum.
But what factors are driving this rally in Nifty? Experts say that the sustained FIIs buying and falling oil prices are among major factors behind the rally even as changing geopolitical situation continues to spook the investors. Going by the data, FIIs have been net buyers since the start of August. FIIs have bought more than Rs 7,000 crore in the cash. The falling crude oil prices over demand outlook concerns is said to be another reason for the positive sentiment in the market.
1. Markets prioritising inflation
Pawan Parakh, director and portfolio manager, Renaissance Investment Managers, said that there has been a sharp correction in commodity prices across the board. Additionally, a sharp increase in interest rates by the US Fed can potentially slowdown the US economy.
“A confluence of these two factors has given rise to the belief that the worse of inflation is behind us and going ahead inflation should keep tapering down,” he said.
If this holds true, Parakh said, then the pace of interest rate increase should mellow down.
“Markets are prioritising inflation control over risks of potential recession and hence the rejuvenation in the equity markets,” he said.
2. FPIs added more than what they sold
Rachit Chawla, CEO, Finway FSC, said that stocks across the globe have grown by around 11 per cent from the lows earlier this year. While the markets depend on earnings growth in the long term, in the short-term, there can be fluctuations based on the psychology of the investors.
“Since the market was overly negative during May-June this year, it was projected that the market would rally by July, and the growth will continue further. This is the one reason that the Foreign Portfolio Investors (FPI) selling has stalled. In July, the FPIs were coming in and buying after nine months of selling; this was followed by an increasing number of buying, which meant that the FPIs have lately added more than what they sold in the last 15 days,” he explained.
“July saw a sharp decline in FII selling and closed with the mild positive flow and there is a turnaround in August with positive inflow. This shift is based on a few assumptions which are yet to fortify – we are past the peak inflation in US and Fed is likely to turn dovish post 2022 i.e. Fed Pivot,” Kunal Valia, Chief Investments Officer – Listed Investments, Waterfield Advisors, said.
3. Worst of inflation behind us?
Rahul Shah, co-head of research at Equitymaster, said that the rally traces its roots to Fed Chairman Jerome Powell’s comments that the pace of interest rate hikes could slow sooner than expected.
As you are aware, the US Fed has raised interest rates quite aggressively over the last few months in order to bring inflation under control. “However, economists are expecting the pace of rate hike to moderate in the coming months and this has boosted sentiments on the street.”
4. Healthy Q1 earnings
“Also, the earnings performance has come in better than expected as nearly 75% of S&P 500 companies announcing results that beat estimates,” he said.
Notably, in Q1FY23, results from the companies so far have been better than estimated and no major weakness has been seen which investors were concerning at the start of the result season.
“Sector-wise, results have been better than street expectation for BFSI, Chemical, FMCG, few Metals and cement companies are cheering market for new high. Recent correction in industrial and agro commodity costs, coupled with attractive valuations, helped the benchmark indices Sensex and Nifty surge in short span of time,” Jitendra Upadhyay, senior equity research analyst, Bonanza Portfolio, said.
5. Nifty: Technical view
Meanwhile, Nagaraj Shetti, Technical Research Analyst, HDFC Securities, said that the short-term trend of the Nifty remains positive and a sustainable move above 17,550 levels could be considered as an upside breakout of the range and that could pull the Nifty towards the next important resistance of 17800-17900 levels in the near term.