Nifty breaches 10,000 mark, closes at 9,964
STREET SIGNS Earnings support will be crucial for rally to continue, say analysts
The benchmark Nifty broke the 10,000-point barrier for the first time on Tuesday, but failed to hold on to the historic level as investors booked profit in recent gainers.
MUMBAI: The Nifty 50 index touched 10,000 points in intraday trades on Tuesday, triggering fresh questions on the sustainability of the current market rally and the valuation of stocks.
On Tuesday, the index opened at 10,010.55 points, up 0.44% from its previous close, crossing 10,000 for the first time ever. It quickly retreated from those levels and ended the day almost flat at 9,964.55. The other benchmark, BSE’s Sensex also hit a peak of 32,374.30 before closing lower.
Analysts say the continued rise in markets is explained by a combination of factors: early June quarter results showing more hits than misses, a good and wide-spread monsoon , continued preference for Indian shares among foreign investors and expectations of an interest rate cut when the central bank reviews monetary policy next week.
“The markets are largely driven by liquidity while structural ly things are improving both at macro- and corporate levels,” said Ravi Gopalakrishnan, head of equities at Canara Robeco Mutual Fund. But“earnings support will be crucial for the markets to continue rally ,” he added.
That earnings support is crucial because the run-up in markets over the past few months — around 21% since the start of the year — has entirely been fuelled by liquidity rather than a belief in better earnings growth.
The Nifty is trading at nearly 18 times its expected earnings for the next 12 months. The Sensex has a higher multiple of 18.6 times. That makes India one of the most expensive markets in the world. The MSCI Emerging Markets Index is trading at a price-earnings (PE) multiple of 12.7 and M SCI World, a proxy for developed markets, at 16.6.
“We are concerned about market valuations getting frothy and wary of investors buying at elevated levels ,” said Saurabh Mukherj ea, chief executive officer at Am bit Capital .“The markets are rising with no fundamental support while earnings growth is not expected.”
Indeed, while early earnings trends look positive, there is still uncertainty about the impact of the goods and services tax implemented at the beginning of this quarter.
The transition to this new tax had led to lower inventories and destocking of goods in company supply chains. Investment demand has still not picked up.
According to a note by UBS Securities India Pvt Ltd ,“the current all-time high Nifty valuation scan be justified only if we presume double-digit growth into perpetuity”.
The brokerage said it has revised its base case (or most probable) end-2017 Nifty targetto 9,000. Even its most optimistic target is 10,000, which shows no upside from current levels.
“The risk-reward fundamentally is clearly unfavourable but we acknowledge that local retail flow can keep markets elevated despite the absence of a nearterm growth recovery,” it said. Domestic institutional investors have invested Rs24,000 crore in Indian stocks so far this year and this is expected to continue as retail investors buy mutual funds.
To be sure, there are others such as Dhiraj Sachdev, senior vice-president and fund manager, equities, at HSBC Global Asset Management, who are betting on earnings to improve in the second half of this year, driven by lower interest rates, higher real wages and the government’s push to increase rural and farm income.
“We are fairly positive on the markets as India is at its best on the macro economy front,” said Sachdev.
On Monday, the International Monetary Fund kept its outlook for India’ s gross domestic product( GDP) growth rate unchanged at 7.2% in 2017-18 and 7.7% in 2018-19.