Nifty, Sensex Watch: Only A Relief Rally Likely Amid Major Geopolitical, Macro Events, Says CLSA

As we enter a three-week period filled with major macro events, the correction in India equity market still has legs, but a relief rally could be seen, according to CLSA.

The brokerage has maintained the defensive, less volatile and mega-cap positioning of its India focus portfolio.

Its Bull Bear Index has moved from extreme bullish to extreme bearish. "Therefore, the market has low expectations going into the coming macro heavy three-week period, with events like the start of the Trump presidency, the Indian national budget and the first policy meet under the new RBI head," it said.

Typically, such extreme bearish sentiment has preceded a market rally. "We make a judgement call that the market may only see a relief rally within a larger correction."

CLSA conceded that at this low sentiment point, forecasting the extent of the rally to follow is nothing more than a judgement call. "Our fears of trade disruptions, a further rise in Indian bond yields, a weakening, rupee, risks of earnings cuts, a slower normalisation of domestic growth and limited valuation room makes us believe this is only a relief rally," it said.

Nifty's recent peak at end-September 2024 coincided with an extreme bullish signal from CLSA's proprietary India Bull Bear Sentiment Index (IPO frenzy amid China awakening).

The brokerage noted that the Nifty has declined over 12% from that peak while the NSE 500, Midcap 150 and Smallcap 250 benchmarks have seen a 14% decline from that high. "Including a 4% decline in the rupee, the India benchmark for Flls has fallen 18% from its peak," it said.

The brokerage is 'overweight' on mega-caps and risk-reward stocks in staples and commodities. Industrials, IT, healthcare and discretionary remain the big underweights in its India focus portfolio currently.

Trump's inauguration tonight is likely to be followed by some important announcements and orders by the new administration soon after, as per media reports. "These may give hints on how disruptive Trump's policies may end up being for global trade, geopolitics, the US dollar, interest rates and EMs," CLSA said. "This will set the tone for flows into EMs like India."

India's national budget, due Feb. 1, will give a sense of the government's plan of balancing fiscal discipline, growth, welfare, political necessities as well as the choice on the path of capex or consumption, to provide a fillip to economic growth, the brokerage said.

This will be followed by the first RBI policy meet under the new governor on Feb. 7, which may lend clarity if the RBI is able to get dovish to boost growth despite rupee weakness. "We see it as a silver lining that the market is going into these important macro events with light sentiment, which equates to low expectations build-up," CLSA said.