Stocks To Consolidate Higher On Rising Flows

Stocks markets are set to rally further as euphoria on the GST Bill and the surge in liquidity from England and Japan is flooding the world markets with liquidity. Emerging markets like India are receiving its fair share of the increase in global dollars.

We have seen the Bank of England cut interest rates for the first time since 2009 announcing a stimulus to spend 70 billion pounds on bond purchases. We also have the Japanese government announcing additional spending of 4.6 trillion yen ($45 billion) this year to get the Japanese economy going.

This stimulus is doing its bit to stimulate the Indian markets. Countries like Taiwan, South Korea, Indonesia and Thailand received $5.48 billion, $3.9 bn, $1.3 billion and $1.2 billion in July. Indian markets received nearly $1.8 billion.
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Another reason for the good cheer in the Indian markets is, of course, the GST Bill. As the government received the nod for the biggest set of reforms which makes the Indian market and open and big market, the growth of the Indian economy is expected to receive a boost in the coming three-four years. India Inc will see benefits of an open market a few years down the line.

On the other hand, the RBI is widely expected to hold rates steady in its upcoming policy meet, but may even surprise with a rate cut given that good monsoons have been more than obliging. A large part of India has received above-average rainfalls and this is likely to increase cultivation of food crops, which will further lower food inflation.

What’s more, the government has unveiled a four per cent inflation target for the next five years under the policy framework with the RBI, which bodes well for the financial markets like stocks and bonds.

The S&P CNX Nifty is now expected to continue to chart a higher course. Over the next few weeks, however, if there is a correction, investors should take the opportunity to build positions in their favourite growth stocks. Stock markets are just four percent shy of an all-time high it hit back in March 2015.

Financials will continue to play an important role on the market’s rally. PSU banks, private banks, and NBFCs still have some way to go as retail lending has been on the rise driving credit growth and boosting consumption. A large number of white good companies are also seeing better volumes growth due to this increase in retail finance options.

Mid-caps are seeing a faster rally than large-caps as retail investors flock to these counters. However, investors should watch valuations here. Currently, the broad-based Nifty has a valuation of 23.57 times earnings, while the mid-caps are reaching valuations of nearly 30 times earnings investors could take out some profits in mid-cap stocks that have raced too fast, too soon.

However, hold on to the counters where earnings growth is still playing out. Some of the mid-cap stocks in these counters could still deliver stellar returns. Hence, if you take some opportunities to book profits, ensure that you re-enter the counters where valuations are low.