Nifty finally hits 10,000; earnings growth in focus
STREET SIGNS Liquidity, Improved economic fundamentals driving rally: Experts
The Nifty 50 index breaching 10,000 points has raised questions on how long the current market rally will last and revived a debate on whether Indian stocks are overbought.
On Tuesday morning, the gauge opened at 10,010.55 points, up 0.44% from the previous close, the first time it breached that mark. However, it retreated from those levels and ended day 1.85 points than Monday’s close at 9964.55. The other benchmark Sensex also hit a life time of 32,374.30 before closing lower.
Analysts say the rise in markets is explained by a combination of factors: early trends in June quarter results showing more hits than misses, a good monsoon that has spread across the country, 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 structurally things are improving both at macro and corporate levels,” said Ravi Gopalakrishnan, head – equities, Canara Robeco Mutual Fund. “Earnings support will be crucial for the rally to continue.”
That earnings support is crucial because the run-up in the past few months — around 21% since the start of the year — has been fuelled by liquidity rather than a belief in 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. To illustrate, MSCI Emerging Markets Index is trad- ing at a price-earnings multiple of 12.7 and MSCI 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 Mukherjea, chief executive officer at Ambit Capital Ltd. “The markets are rising with no fundamental support while earnings growth is not expected.”
While early earnings trend look positive, there is uncertainty about the impact of the goods and services tax implementation at the beginning of this quarter. The transition to this new tax had led to lower inventories and de-stocking of goods in company supply chains. Investment demand has still not picked up.
According to UBS Securities India Pvt Ltd, price-earnings multiple expansion rather than earnings growth explains nearly all of the performance this year for India, especially for cement, consumer staples, autos and nonbank financials. “The current alltime high Nifty valuations can be justified only if we presume double-digit growth into perpetuity,” the brokerage wrote in a note to clients on Tuesday. “We maintain our view of a muted nearterm macro/earnings recovery in India and continued earnings cuts, making the risk-reward unattractive at these levels.
The brokerage said it has revised its base case (or most probable) end-2017 Nifty target to 9,000. Even its most optimistic target is 10,000, which shows no up side from current levels.
“The risk-reward fundamentally is unfavourable but we acknowledge that local retail flow can keep markets elevated despite the absence of a nearterm growth recovery.”
Domestic institutional investors have invested ₹24,000 crore in Indian stocks so far this year and this is expected to continue as retail investors buy MFs.
To be sure, there are others such as Dhiraj Sachdev, head of 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 government’s push to increase rural and farm income. “We are fairly positive on the markets as India is at its best on macro economy front.”