SENSEX AT 30,000: CONCERNS REMAIN OVER VALUATIONS
Corporate earnings yet to justify the surging numbers
The S&P BSE Sensex etched a record and breezed past the 30,000 level on Wednesday, to settle at an alltime high of 30,133, up 0.6 per cent or 190 points. On the other major bourse, the National Stock Exchange, the benchmark Nifty 50 index also closed at a new high, of 9,351, up 0.5 per cent over its previous close.
From its recent closing low in December 2016, the S&P BSE Sensex has gained about 4,300 points or 17 per cent. Globally, the top performing market. The rally in mid-caps and small-caps has been even sharper, with the NSE’s mid-cap and small-cap indices surging nearly 32 per cent and 36 per cent, respectively, in this period. Realty, consumer durables, capital goods, banks and oil & gas, among the sectors, gained from 24 to 64 per cent.
A Union Budget sans negative surprise, a gush of liquidity from foreign and domestic investors, the outcome of elections, domestic (Assembly polls) and abroad (in France), coupled with an earnings surprise from select index heavyweights in the March quarter, have been some of the key factors.
Despite the stellar rise, most analysts are optimistic on the long-term prospects for more. As long as there are no negative events globally and at the domestic level, they expect the markets to remain buoyant.
“As long as the global markets keep performing, India should do well. The prospect of global growth is exciting investors the world over. Given the outcome of the first round of election in France, the nearterm risk for the markets is also now off-thetable,” says Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies.
However, there are concerns. A common thread through most analysis is the currently expensive valuation and the fact that corporate earnings need to catch up. The markets are currently trading at 17.5 times the estimated FY18 earnings, at a premium to the historical average of 14-16 times but still away from the peak level of around 20 times in 2008, analysts say.
“We are unable to fathom the rapid change in the prices of stocks without any major change in their fundamentals. It seems to us that the sole investment thesis in some cases is liquidity. Bizarre, since active investors should be deciding on the fundamental value of stocks, rather than leaving it to a nebulous issue such as liquidity. We can only hope that the fundamentals improve sufficiently to support the valuations,” says Sanjeev Prasad, executive director and co-head, Kotak Institutional Equities.
Thus far in this calendar year, foreign institutional investors and foreign portfolio investors have pumped ~41,787 crore in the equity segment. In April alone, till Wednesday, they’d invested ~2,156 crore, NSDL data show.
“We need a catalyst for a market correction. Just that the stock valuations are expensive is not enough reason for them to correct (fall). The risk-reward (ratio) is definitely not attractive for investors at the current levels and a fresh investment should only be made from a (long-term) five-year perspective. Our Nifty 50 target for December 2017-end is 8,800. Our best and most optimistic target for it is 9,700. In terms of sectors, we are overweight on select financials, consumer staples, IT (information technology) services, automobile parts. The underweights include industrials and infrastructure,” says Gautam Chhaochharia, head of India research at UBS Securities.
Beside earnings, analysts are also mindful of the impact of implementation of the goods and services tax on the economy and corporate earnings, and how the monsoons play out in the second half of this calendar year. Two domestic events that, they feel, have the potential to disrupt the market rally.
“Beside earnings, implementation of the GST Bills and final readings on the level of monsoon can be rally disruptors in the second half. Having said that, we don’t think the earnings going ahead will be supportive. One must also keep a tab on the global geopolitical situation,” says U R Bhat, managing director, Dalton Capital Advisors. Adding: “Given the sharp up-move seen in this calendar year, a correction to 9,000-levels on the Nifty 50 index is possible. In case the other domestic and global factors become unsupportive, the markets can correct around 15 per cent by end-December.”
In terms of sectors, Holland thinks real estate could be a dark horse. That apart, he is overweight on fast moving consumer goods, private banks, shipping and sectors that will benefit from GST implementation.
Jigar Shah, chief executive officer, Maybank Kim Eng Securities, says he suggests a bottom-up and stock-specific approach. He is positive on private banks, financials, four-wheelers, and select companies in the renewable energy and media sectors.