Stock markets will have a real challenge sustaining the rally in May
The Nifty has rallied nearly 15% in the month of April alone. In fact, if you look at the Nifty from the lows of 23rd March, then the returns on the Nifty are close to 27%. What exactly has driven this rally and can the markets hold this kind of frenetic rally in just over a month.
What triggered the rally
To an extent the logic for the rally was global because markets across the globe saw a sharp rally in stock markets, including the all important US markets. Firstly, the market euphoria began with some early success in launching a COVID-19 drug by Gilead of the US. Even as its clinical trials failed, UK based Oxford Research appeared to be moving closer to a cure for COVID-19. Secondly, Indian markets were also enthused by the sharp fall in oil prices. While overall economic slowdown continued to be an overhang, the Indian economy cannot miss the dividends of cheap oil. Thirdly, there were indications that the virus had peaked out globally although it was far from coming to an end. That led to the confidence that normal business would commence sooner rather than later. Fourthly, short covering was a major factor in the rally in India. With most of the leading banks and heavyweights oversold, there was a rush to cover short positions in the Indian market. Cues like the Reliance Facebook deal and the RIL rights only underlined the belief that pockets of value may have started emerging in Indian markets.
Beware the May effect
One thing markets need to be cautious about is the May effect. Normally, May happens to be a tumultuous month for the stock markets. That probably has given rise to the famous quote “Sell in May and go away”. For example it was in May 2004 that the Nifty touched lower circuit for the first time and it repeated this feat in May 2006. Barring the odd year like 2009, which was a big boost to markets, generally May has been a tepid month for the indices. The logic is that May is the month when the monsoon uncertainty is at its peak and markets tend to be cautious. Also, by May, the euphoria of the budget and the new fiscal is almost over and it is time to get up and smell the coffee.
Challenges still remain
But the real problem could be that the pain in the markets is far from over. COVID-19 has afflicted 3.5 million and is far from over. The Indian economy is still unclear how and when the economy will start functioning in normal gear. Most rating agencies have pegged GDP growth for FY20 at below 1% and FY21 GDP growth at around the same level. That is hardly supportive of any decent growth in top line revenues and profits. Banks are expected to see NPAs spiking again and valuations are likely to temper from higher levels. It is time for caution in markets; especially after the 27% rally since the lows of March!
