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MUMBAI: The Indian stock market has rallied sharply in the last few months, undeterred by the second wave of COVID-19. However, HSBC believes that there are several uncertainties ahead in the near term, which are increasing prospects of a pause in this rally. These risks include rising crude oil prices, inflation build-up, strong base of FII flows, stretched valuations, high earnings expectations and uncertainty of the third wave of the pandemic.

“Although broader appeal for India and the bull market context still rises above near-term challenges, a prospective pause and some consolidation in the near term can’t be ruled out as many uncertainties converge,” said HSBC.

HSBC said brent crude oil prices have passed $75 per barrel-mark and any incremental sharp rise could potentially trigger a sell-off in Indian markets.

The brokerage added that the risk of foreign institutional inflows cannot be ruled out. “FII flows snce March 2020 sell-off are touching close to the decade peak (as % of last 12 month market cap), which, benchmarked with the market’s own boundaries, seems to suggest that risk of flows turning negative in the short run can’t be ruled out,” said HSBC.

The brokerage pointed out that valuations across many sectors are now at significant premiums to pre-COVID-19 levels.

Moreover, earnings growth expectations have not been curtailed much for the ongoing financial year despite the COVID-19 wave, said HSBC.

The possibility of a third wave, which can’t be ruled out as the economy opens, also adds to the uncertainty for the second half of the year.

All this points to a pause in the offing.

“Market breadth is now 95%, which is holding at above 80% levels for the past seven-eight months and emerging uncertainties can potentially stop providing fuel for sustained breadth,” said HSBC.

The brokerage is bullish on HDFC Bank, Axis Bank,

, Asian Paints, Cipla, Mahindra & Mahindra, , Phoenix Mills, Avenue Supermarts, UltraTech Cement, HCL Technologies, Embassy Office Park, and .

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