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Below is Weekly article on Markets Afloat Despite Inflation! By Nirali Shah, Head of Equity Research, Samco Securities

“Indian benchmark indices had nothing short of an erratic week following WPI inflation numbers, which hit their 11-year high at 10.49% for April. While higher inflation is disturbing the Street, its near-term impact was outweighed by the declining COVID-19 cases in India. While FPIs turned net sellers only last month, India held on to its position as the most preferred emerging investment destination since April 2019, barring a few months. In the past 12M it has garnered the highest FPI equity inflows of over Rs. 36,618 Crs (as of April 30). Brazil ranks second with around Rs. 10,811 Crs as per CLSA data while other EMs such as Indonesia, Taiwan, Thailand and South Korea have seen net negative net flows.This data indicates that a few months of FPI outflows could cause short-term corrections in the markets but at the end of the day Indian markets continue to remain stable at the current moment. Additionally, as DIIs continue to add equities, bourses may continue to be at loggerheads between the two sides. RBI continued its G-Sec buying program which further funneled growth across the Indian bond markets, enabling the central bank to sustain the current low rate environment while maintaining yields within the 6-6.5% range for the 10-year bond

While inflation has taken center stage across broader markets, fueled in part by the rising commodity prices, the result season has shed light on another perspective. India is amidst a demand pull scenario which is driving earnings and re-rating stocks. Production activities have been at normal levels across consumer goods, for both durables as well as retail, but logistical constraints have emerged owing to limitations in mobility which hasled to both declining volumes and lower realizations for companies. Consumption in the discretionary space has seen a drastic decline because despite liquidity, the common man continues to prioritize his spending towards essentials. This excess money seems to have been diverted towards gold to an extent asit continues to gain traction as an inflation hedge. While demand continues to remain subdued in the short-term due to lockdowns, the trend in merchant exports has been improving strongly as it saw a 195% jump YoY and a 17% jump since April 2019. Organizations are balancing out their inventories by increasing their share of exports to offset domestic cutbacks for the time being. Investors can keep various export oriented stocks on their radar and should allocate certain portion of their portfolio to Gold. A good way for retail investors to invest in gold would be to lap up the current sovereign gold bonds in the market which also have a decent interest component attached.

Event of the Week

Government’s ambitious strategic divestment plans of Rs. 1.75 trillion for FY22 has temporarily been derailed on account of the second wave. From due diligence processes for Air India and BPCL,to divestment of SCI and BEML, to partial stake sale in LIC through an OFS, the timetable of scheduled activities has been unwillingly delayed. But undeterred by these setbacks, government managed to sell a majority part of SUUTI’s remaining stake in Axis Bank via OFS which might garner close to Rs. 4000 Crs. Hence, even with this temporary derailment, 80-90% target still appears attainable which can still save some damage on the fiscal front.

Technical Outlook

Nifty50 index closed the week on a positive note and crossed the previous short term resistance of 15050. Although it is trading very close to its all-time highs but it is still below the rising channel and has not given any directional move to break it yet. Nifty needs to close decisively above 15200 to start a fresh bullish upmove within the channel. As long as it does not take a decisive direction, we maintain a sideways to mild bullish outlook.”

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