Limited space for the current stock market boom to continue

MUMBAI: Amid the Corona epidemic and the economic crisis, the Indian stock market continues to reach new heights with unprecedented historic gains, though all-time highs have raised fears of a major correction in the market. Now, analysts at Bank of America Merrill Lynch have also warned of a near-term correction in the Indian equity market.

“Our analysis of past market rallies suggests that there is limited room for the current boom to move forward,” said Merrill Lynch analysts. We are looking at the possibility of cutting estimates. Due to the high valuation, the Nifty is likely to see an 8% correction in the near term with a target of 15,000.

Speculation of tampering by the US Federal Reserve, possibly higher US bond yields and greenbacks, lower earnings per share estimates, cheaper listings of recent IPOs could act as a negative trigger to dampen investor sentiment. A modest gain of about 3 weeks gives an average return of 105%.

After such a rally, the market usually undergoes a correction of about 50% in a period of four months. The current rally has shown a total return of 114 per cent in three weeks and hence it shows limited growth amidst the risks posed in the near term.

The MSCI Emerging Markets Index is down 1.2 per cent and the MSCI World Index is up 1.01 per cent, while the Sensex and Nifty are up 5 to 7 per cent against the dollar. Mid and smallcap indices, on the other hand, have outperformed the benchmark this month.

Given the rapid outperformance of midcaps and smallcaps, midcaps and smallcaps are down only 3% and 6%, respectively, against long-term averages against the Nifty's valuation premium. Merrill Lunch hopes the trend will change the outlook for the cautionary market, and therefore prioritize large-caps in the near term.

Given the potential increase in lending costs and the pick-up in credit growth, we have maintained an overweight on industrial, with a cautious view of the market, we will take a defensive stance in staples (from neutral) utilities and IT (already overweight). Also, the bulls in the metals are likely to end and the Fed is likely to put pressure on tampering commodities, so Merig Lynch has already downgraded from overweight to underweight.