Momentum can take market higher but analysts caution of sharp correction

New Delhi, July 3 Risk in the stock market is high due to rich valuations and some presently unknown negative developments can trigger a sharp correction, analysts have cautioned.

V. K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said the ongoing rally in the market has made valuations very rich. Nifty is trading at above 20 times estimated FY 24 earnings. This is higher than the historical average.

"Momentum can take the market higher; but at high valuations risk is high. Some presently unknown negative developments can trigger a sharp correction. So, even while remaining invested in the market, investors have to be cautious," he said.

The BSE Sensex scaled mount 65,000 on Monday led by HDFC and Reliance Industries. Indian markets have been scaling new highs led by huge FII buying.

HDFC and Reliance were the top gainers in Sensex up by more than 2 per cent.

Vijayakumar said the ongoing rally in global stock markets is primarily driven by the surprising and unexpected strength of the U.S. economy ( 2 per cent GDP growth in Q1 23), in spite of the savage 500bp rate hike by the Fed. Global markets, which had discounted a US recession by mid 2023, have been proved wrong and the markets are now compensating for the excessive pessimistic discounting in 2022, he said.

He added that an important point of distinction between the rally in US and in India is that the US rally is primarily being led by 8 tech stocks while the Indian rally is more broad based. Sustained FPI flows (Rs 47,148 crore in June) is the main driver of the rally in India.

The recent surge in FPI inflows have been triggered by the recent 'Sell China, Buy India' strategy of the FPIs which, in turn, is being influenced hugely by the anti-China attitude/policy evolving in the US and the developed world.

Since the strength of the market momentum is high, the rally can continue but valuations are getting stretched, he added.