Beware of risk factors as valuations hit the roof, say market experts

Last week was an eventful one for the Indian stock markets as the benchmark S&P BSE Sensex breached the psychological 60,000-mark for the first time in its history. While there was optimism and bullishness visible in most of the blue chips and large cap stocks, the broader market saw more declines than gainers.

This is a trend that has made most market experts wary of the near-term outlook even as they seem to be unanimous in their views about a strong long-term growth story. While there may be optimism in the markets, there are a few risk factors that may affect the market negatively, they say.

"Market participants should be wary of the rising inflation and resulting removal of liquidity from the system," said Piyush Garg, CIO, ICICI Securities.

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"During CY21 there have been some central banks, namely Russia, Korea, Ukraine, who have raised rates. Rising inflation risk and hence withdrawal of ultra-easy monetary policy by global central banks (mainly Federal Reserve) may trigger a sharp rise in bond yields which can cause risk assets to correct sharply," he added.

Garg believes that one can remain invested but should monitor the movement in yields globally, which could result in a sharp 10-15 per cent correction from the current levels.

On Friday, even as the benchmark Sensex gained more than 450 points during intra-day trade to touch a high of 60,333, it pared a large part of its gains to close at 60,048.47. More importantly, the market breadth was weak with nearly 2,000 stocks declining as against less than 1,300 gainers.

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Most of the broader market indices like BSE 100, BSE 200, BSE 500 along with BSE Smallcap and BSE Midcap ended with marginal losses.

"Valuations have reached stratospheric levels especially for lot of the desired high-quality names across sectors. Traders should have cautious approach as intermittent volatility cannot be ignored given such rich valuations. However, we expect the positive momentum to continue on the back of recovery in corporate earnings," said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services.

In a similar context, a note by Samco Securities stated that the volatility, which was witnessed during the last week, is likely to continue in the coming week as well due to expiry of derivatives contracts, and investors should be very selective in their stock picking.

"In the current volatile markets, investors must carefully invest only in fundamentally sound stocks as markets are fickle and unpredictable," it stated.

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