Global cues to dictate market trend ahead

Buoyed by expectations of strong spending on infrastructure by the government, strong corporate earnings and progress in the rollout of Covid-19 vaccines; markets hovered in record territory this week. Extending gains over second consecutive week, the benchmark indices, the Nifty, ended the week at 15,163, up 1.6 per cent and the Sensex surged 1.6 per cent to 51,544. Broader markets relatively outperformed, as the Nifty Midcap, Smallcap gained 2.1 per cent and 3.7 per cent, respectively.

The foreign institutional investors continued to pump money into Indian equities. In January and February this year, they net bought more than Rs 39,400 crore. In contrast, domestic institutional investors were continuous sellers for the past few months. RBI reassurance that monetary policy is likely to continue supporting markets and the economy has given fillip to the markets. Continuing its reformist stance, the GOI has reportedly finalised rules under the four labour codes, paving the way for making reforms a reality by notifying those for implementation soon. Cryptocurrency has been trending for quite some time abroad and also in the country. To take charge of the same, the government indicated that it may bring a Bill to regulate the crypto transaction. FM clarified that the Union Budget proposal of collecting Rs 30,000 crore through Agriculture Infrastructure and Development Cess will go to States so that mandi infrastructure can be improved.

As the corporate earnings season slowly winds down, investors have been cheered by stronger-than-expected reports. Stock prices tend to follow the direction of corporate profits over time. Markets seem to have factored in all the crucial events and the coming week may witness consolidation. With earnings season largely behind us, global cues will dictate the market trend ahead. After the recent march higher, some investors caution that stocks are looking pricey, potentially muting future returns even if positive news continues to arrive.

Heard on the street

Recent experience and financial lore have created the impression that the bursting of market bubbles brings economic destruction. But it isn't always so. The excess in today's story stocks surely poses a threat to the wealth of their shareholders. Even if there is a wider bubble, it might not be a catastrophe for the country. The experience of the past few decades suggests the opposite.

Japan is still scarred by the 1980s property and stock bubble, the dot-com bubble led to massive losses and the subprime crash created a global crisis. But not all bubbles are equal. The economic dangers of a stock bubble come from people taking on debt to buy shares and from companies overinvesting. When the bubble pops, overextended shareholders have to cut spending or go bankrupt. Companies suddenly faced with investors demanding a return have to lay off workers and slash investment.

None of this is an issue for the obvious bubbles under way in the fashionable stocks of the moment. Naukri or Dixon or IndiaMart and many others are valued so highly but would have an insignificant effect on the economy, as their operations are not significant enough to impair the economy. They are mostly equity-financed, so their failure wouldn't start a domino line of bank failures. And while shareholders would be hurt, there's no reason to think that would lead to a collapse in spending across the country. What if today's excesses aren't just in the speculative story stocks like Tesla or the Big Tech - FAANG stocks in USA or Naukri, IndiaMart or others in India - is a bubble, because high valuations can be broadly justified by very low interest rates blah balh.

But if shares in the highly valued technology and associated sectors did crash, it probably wouldn't be that bad. Sure, investors would lose money. But with a few exceptions these companies aren't borrowing nor issuing new stock to fund new investments, and their investors aren't all that leveraged. If their share prices halved, it would make no difference to the underlying business. That is different from the dot-coms, which were forced to slash spending when the market crashed, and they lost the ability to issue expensive new shares. The historical lesson is that stock market crashes don't really cause that much damage. Bubbles funded by banks were the really destructive ones and always are. Black Monday in 1987 is a classic example: harrowing for shareholders, but irrelevant to the economy.

Futures & options / sector watch

According to flash figures released by IRDAI the total premium up to January in the current financial year grew by 2.76 per cent at Rs 1,63,670 crore against Rs 1,59,275 crore YoY. Keep an eye on insurance counters. Renewed buying interest was seen in technology counters. Stay invested in Tech Mahindra, HCL Tech, Infosys and Wipro for further gains. In the banking space strong buying was seen in the leading private banks during the later part of the week. Fresh buying is also indicated in NBFC counters. Further gains indicated in Bajaj 'Twins', ICICI Bank, Axis Bank and HDFC Bank. After mild correction auto and auto ancillary stocks are expected to gain further from current levels. Use declines to buy Motherson Sumi and Bharat Forge. Stock futures looking good are Asian Paints, Dabber, IDFC First, ICICI Bank, PEL, Tech Mahindra, Tata Chemicals and Voltas. Stock futures looking weak are Bata India, Bharti, Balkrishna Industries, Coal India, IOC, RBL Bank and Zee Entertainment.

Stock picks

Deccan Cements Limited is engaged in the manufacture of cement in the form of clinker, Portland cement, slag cement and related products. It sells its products under Deccan Cements brand. It also generates thermal, hydro and wind power. It has cement plant at Nalgonda in Telangana, thermal power plant at Nalgonda in Telangana and hydel power plant at Guntur in Andhra Pradesh. Excellent Q3 results make the stock compelling buy at current levels for medium term target of Rs 750.

Suprajit Engineering Limited is engaged in offering automotive cables, speedometers and automotive components/parts. The company is engaged in the manufacture of auto components consisting mainly control cables, speedo cables and other components for automobiles.

The company's plants are located at Bengaluru, Karnataka; Manesar, Haryana; Chakan, Maharashtra; Vapi, Gujarat; Pantnagar, Uttarakhand; Haridwar, Uttarakhand; Sanand, Gujarat; Pathredi, Rajasthan, and Chennai, Tamil Nadu. The company supplies its products to OEMs and also exports to various countries. The company caters to a range of automotive and non-automotive cable requirements. The company has an annual production capacity of approximately 225 million cables. Buy on declines for medium term target price of Rs 450.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)