A Wall Street brokerage has warned of a 9 per cent near-term correction for the equity market, saying the “street has only limited runway to continue the rally” that began in the second half of last year.
The benchmark index Sensex has added a whopping 6,000 points since January and touched 56,000 on Wednesday.
Following the pandemic mayhem, the stock market tanked over 35 per cent in March 2020. It has rallied over 118 per cent since then and after scaling 50,000 in January, the Sensex has peaked the 56,000-mount earlier this week.
"We expect the markets to correct near-term to the tune of 9 per cent. Our Nifty target is 15,000 by December implying a 9 per cent potential downside near-term," analysts at Bank of America Securities India said in a note on Friday, adding an analysis of the past market rallies that suggests the current rally has limited runway.
The report has not given guidance on the Sensex target.
"Our analysis of the past market rallies suggests that the current rally -- over 118 per cent in the past 73 weeks -- could have limited further runway. We see the risks of estimate reductions and with peak valuations, and expect the markets to correct 9 per cent near term with our Nifty target at 15,000 from the current levels," they said.
"Our analysis of the past bull and bear rallies suggests a typical run of about 75 weeks, providing an average 106 per cent return. After such rallies, the market typically corrects about 30 per cent over a four-month period," the report said.
It further added that since the current rally has amassed a 118 per cent total return over the past 73 weeks, "we see limited further runway in light of emerging risks near term."
Peak valuations, the US Fed's tapering talk, rise in US yields, a strengthening dollar, the consensus EPS cuts, and the muted IPO gains in recent weeks could act as negative triggers, they added.
Yet, they are overweight on the defensives like industrials and financials and underweight on materials, overall preferring large caps as against mid and small caps earlier.
It can be noted that there has been a massive 64 per cent increase in the retail participation in terms of daily volume since March 2020, up from 45 per cent earlier. This was one of the key contributors to the rally present. But the muted gains within IPO listings recently poses a risk to levered retail positions, it noted.
It is overweight on industrials, given the expectation of multi-year capex upcycle and the financials on the likely peaking credit costs and a pick-up in credit growth. But the rally in metals is likely near an end, and the Fed tapering could put pressure on commodities..., it added.
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