Beware of risk factors as valuations soar, market experts say

The past week has been eventful for Indian stock markets as the benchmark S&P BSE Sensex broke the psychological 60,000 mark for the first time in its history. While there was optimism and optimism in most blue-chip and large-cap stocks, the market as a whole has seen more declines than gainers.

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

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

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“During CY21, some central banks, namely Russia, Korea and Ukraine, raised their rates. The rise in the risk of inflation and therefore the withdrawal of ultra-relaxed monetary policy by global central banks (mainly Federal Reserve) can trigger a sharp rise in yield bonds which can lead to a sharp correction in risky assets, ”he added.

Garg believes that we can stay invested but that we need to watch the evolution of returns on a global scale, which could cause a sharp correction of 10 to 15% from current levels.

On Friday, even as the benchmark Sensex gained over 450 points during intraday trading to hit a high of 60,333, it slashed a large chunk of its gains to close at 60,048.47. More importantly, the market width was small with almost 2,000 shares down against less than 1,300 winners.

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Most of the larger market indexes such as BSE 100, BSE 200, BSE 500 as well as BSE Smallcap and BSE Midcap showed marginal losses.

“Valuations have reached stratospheric levels, particularly for many desired high-quality names across all industries. Traders should take a cautious approach as intermittent volatility cannot be ignored given such rich valuations. However, we expect the positive momentum to continue with the recovery in corporate earnings, ”said Siddhartha Khemka, Head of Retail Research, Motilal Oswal Financial Services.

In a similar context, a note from Samco Securities said that volatility, which was seen over the past week, is also expected to continue into next week due to the expiration of derivative contracts, and investors are expected to be very selective in their stock selection. .

“In today’s volatile markets, investors should carefully invest only in fundamentally sound stocks, as markets are volatile and unpredictable,” he said.

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