Markets rally on liquidity surge, but will it last?
MUMBAI: A surge of liquidity pushed Indian benchmark indices to a nearly two-year high before investors took some money off the table. These gains are in line with the return of risk appetite in global equities, but high valuations and continued earnings downgrades call into question the sustainability of the rally, experts said.
On Thursday, the National Stock Exchange’s 50-stock Nifty tested a 23-month high intraday level of 8,970 before closing at 8,939.50, just 0.14% higher than the previous day. The BSE’s 30-stock Sensex touched 29,000 during the day before closing at 28,892.97, up 0.1%.
“Only liquidity is driving the market and there is no fundamental support,” said Ambareesh Baliga, an independent equity analyst.
Since the start of this year, foreign portfolio investors have bought Indian stocks worth $1.3 billion after selling $4.6 billion in the December quarter. Consequently, Indian equities have rallied 9% so far this year, in line with other global indices. The MSCI Emerging Market Index, in comparison, is up 10.2% since the beginning of this year.
With corporate earnings lending no support, valuations are also starting to look expensive, said analysts. The Sensex is currently trading at 17 times its estimated earnings for the next fiscal year, about 13% higher than the long-term average price-earning multiple.
Returns will be capped owing to “possible near-term reversal of global wave, market’s under-appreciation of residual impact of demonetisation, rich valuations and continued risks of earnings downgrades”, Bank of America Merrill Lynch analysts wrote in a note to clients on Thursday. The brokerage has a 29,000-point target for the Sensex in December, a little higher than Thursday’s close.
With the December quarter financial results season ending, analysts have slashed corporate earnings forecasts not only for the current fiscal year, but also for the next year. Indeed, data from Bloomberg shows that over the past month, consensus Sensex earnings per share forecast among analysts it polls has come down by 1.5% for the current fiscal and 2.4% for the next.
Analysts are fretful that the effects of demonetisation will be prolonged and rising commodity prices and the implementation of the goods and services tax will hurt earnings growth.
“Slowdown in consumption and commodity cycle pricing are key concerns,” said Yogesh Mehta, vice-president at Motilal Oswal Financial Services Ltd.
Even a slightly more optimistic securities house like Kotak Institutional Equities has said that earnings recovery will be largely due to sector-specific factors and not “fantastic hopes of a domestic economic recovery”.
In a February 16 note, Kotak analysts warned that there are “downside risks to earnings in cement, consumer discretionary and industrials if domestic demand conditions were to stay subdued”.
To be sure, there is no shortage of believers too.
“Returns in other assets like gold, fixed income and real estate are not good. It looks like investors’ continuous fund allocation to equities will drive the rally,” said Pankaj Pandey, head of research at ICICI Securities Ltd.
THE SENSEX IS TRADING AT 20 TIMES ITS ESTIMATED EARNINGS FOR THE NEXT FISCAL, ABOUT 13% HIGHER THAN THE LONGTERM AVERAGE PRICEEARNING MULTIPLE