Bulls rule as indices near record high

POSITIVE FOREIGN FLOWS, RELIANCE RALLY AID GAINS LIQUIDITY-DRIVEN RUN, NO PICK-UP IN EARNINGS YET, CAUTION ANALYSTS

After a slight hiccup last week, bulls regained charge on Monday with benchmark indices closing in on a new all-time high.

Strong foreign inflows, progress on the goods and services tax (GST) front and expectations of a favourable outcome in the Uttar Pradesh Assembly elections by the ruling Bharatiya Janata Party (BJP) saw the Nifty climb 0.74 per cent to close at the highest level in two years.

The 50-share blue chip index closed at 8,963.45, less than 40 points — 0.4 per cent shy of a record high. The Sensex gained 0.75 per cent, or 215.74 points, to close 29,048 — around three per cent away from uncharted territory.

Foreign institutional investors on Monday invested ~564 crore, taking their year-to-date investment tally above ~12,000 crore.

Mutual funds, too, have been strong buyers, investing over ~8,000 crore so far in 2017. The strong flows have seen the benchmark indices climb 12 per cent since the beginning of the year — one of the most in Asia.

Index heavyweight Reliance Industries added 3.7 per cent to close at ~1,305, the highest since May 8, 2008. The Mukesh Ambani-led firm has gained nearly 20 per cent since the start of the year and has contributed to the bulk of the current market rally.

Market players feel the indices could climb to new highs this week if heavyweights — RIL, HDFC Bank and ITC — continue to make positive strides.

Following the sharp rally, the Sensex is now trading 19 times its projected earnings for the next 12 months.

Although the valuations are above long-term averages, increase in demand for equities — as component in household savings — could support higher valuations, feel analysts.

“Net demand for Indian equities is rising rapidly, implying the potential for a valuation overshoot. Domestic investors are already significant buyers of Indian equities and corporate buying is adding to this demand,” said Ridham Desai, managing director, Morgan Stanley India. The brokerage last week increased its year-end Sensex target by 10 per cent to 33,000.

Besides domestic investors, foreign investments, too, have been strong in emerging markets (EMs) like India. Investors’ risk appetite has been fuelled by weakness in the dollar against EM currencies. Experts say there could be some pull-back in flows ahead of the US Federal Reserve’s meeting on March 15. The US central bank is widely expected to increase policy rates for the first time since December 2015.

Analysts say markets are shrugging off the imminent rate hike, on expectations of a stronger momentum in the US and global economies.

Back home, policy reform measures such as the GST are keeping investor sentiment buoyant. Besides, investors expect the BJP government to step up its reforms agenda, if there is a positive verdict in the ongoing state elections on Saturday (March 11). However, analysts say lack of a strong revival in corporate earnings could make the markets vulnerable.

“With no material change in earnings estimates and no visible evidence suggesting the risk of consensus earnings downgrades is now firmly behind us, the liquidity-driven expansion in valuations looks unlikely to sustain. We remain excited about the roll-out of the GST in July,” said Abhay Laijawala, head of India equities research at Deutsche Bank.