Indian markets have witnessed a breathtaking rally, jumping nearly 3,000 points in just one month. The rally has been led by some heavy buying by Foreign Portfolio Investors in frontline stocks.
Huge Inflows From FIIs In March
March 2019, saw one of the best inflows from FIIs in recent times, with a net inflow of a staggering Rs 32,371 crores. There has been heavy buying after the Balakot air strikes, with hopes that Prime Minister Narendra Modi would be back for a second term. Also, the sharp recovery in the rupee has led to this buying.
In fact, when the rupee strengthens, we tend to see strong inflows from FIIs. It is unlikely that we will see the rupee strengthen a great deal from here.
Election Results Have A Tendency To Surprise
In the past, we have seen that there were surprise results in 2004 and 2009, and at both times, Congress sprung a pleasant surprise. Remember, there is rural agrarian distress, along with unemployment, which affects a significant part of the population.
A recent survey has noted that the impact of the Balakot strikes, seems to have been waning.
The Congress manifesto and its NYAY scheme also seem to have changed the narrative a bit. So, it may be time to tread with some caution.
Beaten Down Sectors Look Attractive
The beaten down sectors of the economy still look interesting. For example, stocks from the autos sector have seen a tremendous downside. Some of these may see good growth if there is a revival in sentiments and demand.
On the other hand, banking names have seen the significant rally and hence the valuations in some cases are already looking stretched.
Inflows Into Mutual Funds The Key
The next 3-4 months would be interesting for the stock markets, especially with regards to the flow of funds through mutual funds. It is important to remember, that through 2018, these inflows have kept the market at these levels.
If there is a decline in inflows, especially through SIPs, we might see some decline in the market. In any case, May 23rd, the day of counting would be crucial for the markets and one has to wait and be patient until then. If you are not sure, which way the wind will blow, it would be good to stay on the sidelines. At the moment, in any case, the markets look overpriced and there could be some more profit booking.