Nifty 50 unbeatable since outsized US Fed rate cut: What should be your trading strategy amid high valuations?

The Indian stock market has picked up an invincible rally since the US Federal Reserve delivered its supersized interest rate cut by 50 basis points (bps) last week. Nifty 50 has hit new highs in every session since the rate cut boosted investors’ global risk appetite, while the Sensex topped the historic 85,000 mark this week. Sustained foreign fund inflow in Indian equities and robust macro indicators contributed equally to the rally.

On Wednesday, the Nifty 50 reversed course in the final hour of trade to close 0.25 per cent higher at 26,004.15 points, with nine of the thirteen major sectoral indexes logging gains on the day. The BSE Sensex was up 0.3 per cent, settling at an all-time high of 85,169.87. Both the benchmark indexes had dropped as much as 0.2 per cent earlier in the session. During the day, it surged 333.38 points or 0.39 per cent to hit a record intra-day peak of 85,247.42.

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The 30-share BSE Sensex closed above the 85,000 level for the first time on September 25, while the NSE Nifty 50 scaled the 26,000 peak at close on Wednesday as fag-end buying in banking and power shares helped stock markets recoup early losses. The spotlight has shifted to US Fed Chair Jerome Powell’s comments on rate cuts and US inflation data due later this week.

D-Street experts on stock market’s performance:

Prashanth Tapse, Senior VP (Research), Mehta Equities Ltd: “Markets were extremely range-bound for most of the trades, but winding up of short positions ahead of tomorrow’s monthly expiry triggered a small rally towards the end, which saw both benchmark indices, Sensex and Nifty, closing above their psychological levels of 85,000 and 26,000 respectively. 

However, broader market weakness due to profit-taking could signal that the current rally may face intermittent hurdles due to global uncertainty and rising Middle East conflict. The short-term technical outlook continues to favour bulls on backdrop higher/high low patterns on all time frames, with Nifty’s immediate goal post now seen at 26250 while the psychological support is at 25,750 mark.”

Ajit Mishra – SVP, Research, Religare Broking Ltd: “Markets experienced a volatile session but managed to extend their upward trend, with a sharp rally in the last half hour pushing Nifty to close near the day’s high at 26,004.15. The tone was subdued throughout most of the day, while sectoral performance was mixed. Profit-taking in midcap and smallcap stocks put pressure on market breadth.

We maintain our bullish outlook amid ongoing consolidation and recommend focusing on stock selection aligned with sectoral trends. Besides rate-sensitive sectors, we observe strong momentum in metal and power stocks, while the current correction in IT presents a buying opportunity. Traders should plan their positions accordingly.”

Vaibhav Porwal, co-founder, Dezerv: “The current market levels reflect market fundamentals and liquidity flows. Fundamentally, the markets should deliver 12-15% returns per annum; therefore, we expect 18-24 months for markets to reach these levels. However, a strong buying momentum in the market is fueled by strong liquidity. In such a scenario, markets can overextend. Which means that we may see the 100k number shortly.”

Nifty, Sensex at record highs: What should be your trading strategy?

The US Federal Reserve’s decision to cut rates by 50 basis points signals a shift in global monetary policy, and its ripple effects are felt across global markets, including India. Sectors benefiting from lowering interest costs might include real estate and infrastructure companies, which are heavily debt-funded. 

Many Indian NBFCs have recently looked outside India to fund their capital at lower interest rates and might benefit from this regime. Other indirect beneficiaries could be discretionary sectors such as automotive and FMCG companies. 

Sectors involving high debt, such as real estate and infrastructure companies, should benefit from a lower interest rates regime. A reduction in interest rates can ease the massive debt burden on telecom companies, especially with ongoing 5G rollouts. The sector may experience enhanced profitability and attract investor interest. Also, selective mid-cap and small-cap companies with significant debt at relatively low valuations can be looked at for future value appreciation.

According to Amit Golia, Group CEO of MarketsMojo, over the past three months, the dollar index has fallen by nearly six per cent in anticipation of a rate cut by the US Fed. Indian investors need to be mindful of sectors such as IT and pharmaceuticals with higher exposure to revenues in USD, as a depreciating dollar will lead to lower sales realization in INR terms. 

“Investors should try to maintain a diversified portfolio to minimize the effects of such monetary actions worldwide. Such diversification would require minimum efforts to rebalance and provide satisfactory returns over the long term. Indian market valuations are already elevated, suggesting that the potential benefits of a rate cut have largely been priced in. As a result, expecting substantial returns from investments in rate-sensitive stocks may no longer be a viable strategy,” said Amit Golia.

“India’s growth narrative remains robust, as reflected in the markets that command some of the highest valuations globally. Retail investors should focus on selecting promising companies in the right sectors and hold their positions for the long term,” added Golia of MarketsMojo