Financials and IT likely to lead next leg of rally in markets, says Roop Bhootra

What a week for Indian markets. Benchmark indices are up over 2% and over 8% for the month of July. What led to the price action?
There were two-three major factors that led to the kind of recovery seen in this week. Firstly, the markets were already oversold, and value pockets were emerging with investors waiting for some relief from in global macro pressures which came as global commodity prices along with oil leading to fall in inflation going ahead.

Secondly, the US Fed policy meet commentary was taken as dovish by markets, and the Fed’s emphasis of further hikes based on data helped improve sentiments as markets are pricing inflation coming down by the second half of this year.

Now with the recent stance markets are now expecting the Fed Funds terminal rate to arrive earlier than expected which led to a sharp relief rally.

Thirdly, the foreign funds have also started to turn positive in India as seen in the last few days which is also adding to the sentiments.

In terms of sectors, BSE Metal index rallied over 7% in July. Do you see a similar performance in August? Will the rally continue and any top sectoral bets?
Metals sectors has been the worst performing sector in past few months due to macro headwinds and export regulations imposed by the government to control rising prices.
The sector could continue to remain under pressure barring some relief rally till macro headwinds remain.

The sectors which should perform better are Financials, Manufacturing and Capital Goods, Specialty chemicals, and IT also attractive at current valuations.

Which sectors will participate in the next leg of the rally as we chart our journey above 17000 on the Nifty?
I think Financials as credit growth is good and upcoming festive season augurs well while IT which is now trading at attractive valuations and both being almost 50% in weights should participate if Nifty rally continues, also some support could also come from manufacturing and industrials.

Small & midcaps marginally outperformed. What led to the price action and should one now consider going overweight in broader market stocks as most negatives are factored in?
The recent fall was seen in mid and small caps removed a lot of excess valuation and many good and growing businesses became attractive on valuation terms.

With improvement in macro factors and recent results coming in fairly on good terms re-affirmed the underlying strength of these businesses and attracted investor flows.

I think the worst is behind us and now it’s up to the corporate results which should decide further course in the markets. Investors could start looking at adding some positions in companies reporting better results.

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