Rising bond yields, rising commodity prices capitalization market, analysts say

A sharp rise in bond yields, coupled with rising commodity prices, has returned to haunt stock markets, with most analysts expecting stock markets to rise only from now on.

Asian stocks fell sharply on Friday after the main Wall Street indices fell, with tech-related stocks under pressure following a sharp rise in benchmark US Treasury yields, which hit their highest level since March. onset of pandemic – up 14 basis points (bps) to 1.5286 percent. The push came on the back of expectations of strong economic expansion and related inflation.

“In line with the global trend, Indian yields have definitely bottomed out. Since February’s expansionary budget, 10-year India is up 28bp to 6.18 percent despite verbal and explicit market support from RBI. Our end-of-December’21 target of 6.5% will likely be met sooner. The spread between the earnings yields (1 / Nifty at one-year term PE) and the yield on 10-year bonds is now 156 basis points, 57 basis points higher than the long-term average ”, said Mahesh Nandurkar, general manager of Jefferies.

Since their March 2020 low, Indian markets have mostly been on a secular uptrend. The frontline indices – the S&P BSE Sensex and the Nifty 50 – jumped 92% and 94%, respectively through February 25. 128 percent, respectively on BSE during this period, according to the data.

Rising commodity prices, on the other hand, pose another challenge. Brent crude oil prices, for example, have climbed nearly 250% to around $ 66.59 per barrel from their April 2020 low. Copper prices have traded near their 10-year high , while other base metals also rose as the US Federal Reserve reaffirmed its loose monetary policy to support the growth of the world’s largest economy.

According to a recent report from BofA Securities, 31 Nifty50 companies, or 46% of the free float-weighted Nifty market cap, are exposed to commodity risks and warn that the full impact of rising commodity prices remains at risk. to play. outside.

In this context, analysts see limited improvement in the markets and see the indices entering a phase of consolidation.

“Historical analysis suggests that Nifty could rise further, although our preferred yield (bond-earnings) valuation metric only points to a single-digit market rise. Housing investments and cyclicals are expected to outperform, ”adds Nandurkar.

A similar point of view is shared by analysts at Credit Suisse Wealth Management. While long-term fundamentals remain intact and remain bullish on cyclical sectors, they also expect markets to consolidate after a strong rally since March amid short-term headwinds.

“The Indian stock market has evaluated many positive aspects and we expect it to consolidate in the near term. However, given our constructive outlook for equities in a medium term perspective, we recommend that investors focus on buying lows with a preference for cyclical sectors rather than defensive sectors, ”Jitendra Gohil wrote. , Head of Indian Equity Research at Credit Suisse Wealth Management in a recent memo co-authored with Premal Kamdar.



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