Rally has more legs as earnings set for a boost
The markets will add to the historic gains made on Friday, with most analysts revising upwards the Sensex targets as they see the tax cuts boosting corporate earnings. Over the weekend, most of the brokerages have hiked the earnings estimates for the top-tier firms by an average 10 per cent.
The Indian markets will add to the historic gains made on Friday with most analysts revising upwards the Sensex targets as they see the tax cuts boosting corporate earnings significantly. Over the weekend, most of the brokerages have hiked the earnings estimates for the top-tier companies by an average 10 per cent and also revised upwards the index targets by a similar quantum.
The markets had rallied 5 per cent on Friday — their biggest single-day stride in over a decade. Experts say there is a scope for the markets to rally another 5 per cent from current levels as investors, especially domestic institutions, will continue to lap up shares as they see tax cuts boosting earnings, spurring private investment and a positive impact on the overall economic.
The surprise decision by the government has come at a time when the market sentiment was the weakest in many years. The Sensex on Friday had ended at 38,015, up 1,921 points, or 5.3 per cent, the Nifty had closed at 11,274, up 570 points, or 5.3 per cent. In an earlier session, the two indices had hit a seven-month low.
Market players say their rally will have more legs as heavyweights in the banking, technology, and oil and gas are expected to rally further.
“The tax cut is a big-bang reform equivalent to the 1997 dream-budget. The measure will benefit in multiple ways. Earnings will rise by up to 10 per cent and companies will be able to post double-digit earnings after a long time. Also, there corporate savings will increase, which they will start spending as the economy recovers and boost investment demand,” said Jyotivardan Jaipuria, managing director, Valentis Advisors.
Morgan Stanley, UBS, Kotak Institutional Equities, and Edelweiss are among the brokerages that have revised upwards the earnings growth estimates for the current year to as much as 25 per cent. Before the tax cut announcement, the consensus earnings growth estimates were below 15 per cent.
“It is a dramatic measure, and no one expected the government to forego ~1.5 trillion of revenues. The government in one shot did what it was expected to do over the next five years,” said UR Bhat, director, Dalton Capital India.
Market players say following the tax cuts, the market mood had changed from bearish to positive, which should help sustain the rally.
Investors, however, will keep an eye on bond prices. On Friday, the yield on the 10year government bond had surged by more than 20 basis points in intra-day trade on fears that the borrowing will shot up and tie the hands of the Reserve Bank of India when it comes to further monetary easing.
Some say once the stock prices adjust to the revised earnings, the market will move on to other triggers such as economic data, global factors such as oil and US- China trade tensions, and foreign portfolio investor (FPI) flows. So far this quarter, FPIS have pulled out a record $5 billion from the market, weighing on the stock prices and the rupee. Even after Friday’s announcement, the FPI buying was muted even a domestic institutions went full throttle. Experts said FPIS might wait to see whether the tax cuts boost demand.
“This measure would probably add to corporate earnings but durable growth in earnings would require revival in consumption demand,” said Dhaval Kapadia, director of portfolio specialist, Morningstar India.
“In the near-term, FPIS would be more influenced by international events. Some of the global headwinds need to ease for overseas investors to move to a ‘risk-on’ stance,” said Bhat.