Markets Likely to Experience Relief Rally Amid Short Covering, Ongoing Event-Driven Volatility

Market Relief Expected as Middle East Ceasefire Announced

A potential relief rally in markets could be triggered by the recent ceasefire announcement in the Middle East, according to Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company. Shah believes that the safety of nearly 9 million Indians working in the Middle East remains a critical concern, and that the availability of energy, with the opening of the Strait of Hormuz to pre-war conditions, along with energy prices moving closer to pre-war levels, would be essential.

The relief rally, however, may be short-lived, with Shah noting that markets will continue to react to events. He advises investors to remain disciplined, following their asset allocation strategy and avoiding the temptation to chase momentum based on events. "Investors should be a disciplined investor, catching a falling knife," he said.

In a separate conversation with CNBC-TV18, Shah discussed the impact of the war on oil prices and the Indian markets. He noted that keeping oil prices in double digits rather than triple digits is crucial, and that at 18 times forward earnings, Indian markets were still trading at a premium to emerging markets. The key factor to watch will be the impact on June quarter results, which have been affected by the one-month war.

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Shah also pointed out that after delivering positive returns for 10 years, a flat performance for the Nifty in the 11th year would be reasonable. He noted that BFSI valuations have corrected, with potential margin impact expected in the March quarter, and expects BFSI and domestic-focused consumer discretionary sectors to outperform.

On allocation, Kotak AMC is maintaining the higher end of neutral equity allocation in balanced and multi-asset funds, with cash levels below 1% after deploying into equities. Shah added that small caps have shown stronger earnings growth than large caps, while the rupee has been performing well following measures by the RBI.