Stocks are on the front foot, backed by a middling to fair recovery in high-frequency indicators. Even rural demand has been better, seen from the pickup in two-wheeler sales. In fact, stocks have been rising despite more covid-19 cases in India, and globally.

The June quarter rally in India was the strongest in many years, despite the worst drop in earnings expected. Besides, investor sentiment has been sharply improving. The result? Non-banking and financial stocks are back to pre-covid levels.

The Nasdaq Composite and China’s benchmark index rallied to highs. Some of the optimism also stems from the fact that a few covid-19 vaccines have made it to phase III trials globally.

There is a hitch, though, in the market’s upmove. The Dow Jones in June has not been supportive. It has been a laggard ever since it hit its June 8 high. Indian markets which for long were following the Dow Jones has decoupled in the last week. But a contraction in the Dow Jones still poses a risk to Indian markets.

Another factor to watch is the sustainability of the recent demand pickup. As the rate of new cases is not slowing, demand for big-ticket discretionary items could be subdued for longer.

“While everybody is looking at FY22 earnings recovery, there has to be some momentum given by FY21 to FY22. On that count, if things do not fall in place in terms of covid-19 coming under control, analysts will start to cut FY22 earnings both for the overall market and bottom-down as well. A covid-19 vaccine could change the dynamics for the markets though, even if it comes one-year down the line,” said Rajiv Sharma, head of research, SBI Capital Market.

Nevertheless, some indicators are encouraging. India manufacturing PMI jumped up quite well.

The auto sector, particularly two-wheelers, has geared up from April and May lows. Investors may want to watch the rebound as sales from upgrading and replacement demand from older vehicles has been low.

On the financing side, the RBI has announced special funding for NBFCs. While that’s welcome, the relief is not much.

But for housing finance major HDFC, raising cash to buffer liquidity will build a war chest to fund acquisitions. Chairman Deepak Parekh has said that the group’s subsidiaries could look at inorganic growth.

With unlock 2.0, many sectors have re-opened businesses. But multiplexes are still shuttered, and that is squeezing returns.

But it’s a different picture for Vodafone Idea. The company’s net worth is eroding, despite tariff hikes.

However, investors were not too happy with the restructuring announced in Motherson Sumi’s business. Its stock fell as the merger valuation is skewed towards the promoter.

Meanwhile, KKR announced an open offer for JB Chemicals and Pharmaceuticals. For a reasonably well growing business, the premium may be a tad low.

Furthermore, stock markets may have to contend with a slowing banking sector this year. The bad loan pile that bankers were chipping at in the last few years will further increase.

In the past few years, the banking sector heavy-lifted earnings growth. This year, that may not be the case.

Besides, the rise in stocks has raised the market’s valuations. Large-caps are starting to look expensive with quite a few trading at the upper-end of the valuation band.

Ultimately, it all boils down to how soon normalcy returns. Analysts at HDFC Securities have said that achieving 80-90% normalcy would be easy, but reaching 100% would be a challenge and a slow grind.

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