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Can much-awaited capex cycle unleash bull run this year?

This week while bulls powered through with renewed optimism, some hesitation was seen mid-week as investors read into Fed’s hawkish policy minutes. As the Street searches for catalysts to fuel the rally this year, it seems 2022 can potentially witness the unfurling of India’s much-awaited capex cycle.

Historically, during 2003-07, when India saw one of the strongest capex cycles, markets zoomed more than 6x. In fact, sectoral indices such as banking, auto, metals, capital goods rallied between 6x to 23x. The current economic scenario is quite similar to the one that existed in the early phase of the 2003-07 cycle. In fact, some indicators are even stronger currently.

For instance, corporate leverage was around 1.3x in FY03; post witnessing record deleveraging, it stands at ~0.8x in FY21. One of the key reasons for the sluggish capex formation in the last few years was the elevated banking NPAs. The deleveraging has further led to bottoming of banking net NPAs, which have now abated to 2.5% from 4% in FY03.

The 14-government led PLI schemes aggregating to Rs 3.46 lakh crore can act as a game-changer to boost the manufacturing sectors. Even the savings from tax rate cuts which were earlier utilised for debt servicing can now be channelled into incremental capex.

With the revival of the real estate sector, household capex is already picking up. Many other factors including flushing liquidity, low interest rates, improving capacity utilisations, significant pick-up in commodity-driven sectors, suggest that a similar capex trend can play out now.

If India’s dream capex cycle is actually realised, history suggests that good wealth creation can follow. Investors can thus look out for companies that can benefit from the up-cycle and invest accordingly.

Event of the Week

This week, Bank Nifty pillared the rise of the market as renewed interest in banking stocks was seen. Green shoots have become evident as 10 out of 13 banks have reported double-digit loan growth as per the Q3FY22 business updates. Earnings momentum is likely to continue in Q3FY22 from Q2FY22, with banks reporting higher top line as a consequence of improving collection and solid credit growth.

Going forward, the banking sector’s quarterly result will be one to track, since the updates have heightened hopes of a better performance in Q3FY22. Further, given recent events in light of the Omicron variant of Covid, it will be critical to closely listen to the management commentary of various banks on growth outlook and risk perspective.

Technical Outlook

Nifty50 closed the week on a positive note but on the last trading session, the index formed a spinning top pattern at 61.8% Fibonacci retracement of the decline from the top. On the other hand, while Bank Nifty remained the top gainer among sectoral indices, the index formed a Shooting Star pattern on the daily chart. These formations indicate that both the benchmark indices seem to be facing a mild resistance at current levels.

ET CONTRIBUTORS

Having said this, the underlying bullish momentum remains intact as long as the Nifty does not break below 17,550 levels. We suggest traders maintain a cautiously bullish outlook, as a fall below 17,750 can lead to a retest of previous support of 16,850.

Expectation for the week

The Q3FY22 results season will kick off with large-cap IT firms reporting their results first. IT stocks in India have outperformed the benchmark in recent weeks, fuelled by anticipation of an uptick in deals and a resultant robust growth momentum. Margin outlook, revenue guidance and attrition numbers will be key monitorables in the sector.

On the macroeconomic front, investors will be closely watching the domestic inflation rate along with inflation figures for United States and China. Contrary to other central banks, RBI seemed confident of contained inflation in India. A higher than anticipated inflation would hint towards a hike in policy rates sooner than expected and cause jitters in the market. Nifty50 closed the week at 17,812.70, up by 2.64%.

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