Sensex, Nifty rally nearly 1% ahead of Gujarat polls

GLOBAL SHOW Nikkei, Hang Seng also closed up over 1% on China trade data MUMBAI:

Indian markets rallied on Friday riding on the tails of a global stock rally, amidst hopes that the ruling Bharatiya Janata Party (BJP) would win elections in Gujarat that start this week.

The Sensex ended at 33,250.30, gaining 301.09 points or 0.91%. The 50-stock Nifty closed at 10,265.65, up 98.95 points or 0.97%.

Markets around the globe also climbed on Friday with the Nikkei and Hang Seng closing up over 1% on better-than-expected China trade data.

In India, domestic investors continued to buy aggressively. They have bought ₹3,948.55 crore worth stocks in December and ₹86,130.76 crore in 2017 so far.

Although it is tipped to be a much closer fight than earlier expected, opinion polls show the BJP holding the edge in the Gujarat assembly polls.

“Market assumptions so far have been of a comfortable BJP victory in Gujarat, and that the momentum continues till 2019,” a December 5 Credit Suisse note stated.

Analysts, however, continue to flag rising valuations as a key risk factor. Despite a massive 24-25% rally in the Sensex and Nifty this year, there has not been much improvement in earnings growth prompting foreign investors to pare their holdings in recent times.

FIIs have sold Indian shares worth $485.32 million so far this month, while they bought $8.37 billion in this year.

The earnings estimate for Nifty has been slashed by 8.9% and 2.7% for this year and next fiscal, according to Bloomberg data.

However, a few analysts think that an earnings revival is just round the corner, which will lead the markets to new highs.

Nomura Group, for instance, has set a December 2018 Nifty target of 11,880 predicated on a revival in company earnings.

“Corporate earnings-to-gross domestic product (GDP) ratio is at its lows, with significant contraction in margins and return on equity. We are at the cusp of a business up-cycle and are set for a multi-year recovery going ahead. Earnings growth can be 20% in financial year 2019 and is likely to sustain,” said Saion Mukherjee, managing director and head of equity research at Nomura’s Indian unit.

According to Manishi Raychaudhuri, head of equity research (Asia-Pacific), BNP Paribas, India suffered from reform-related economic disruptions in 2017, but a recovery seems clearly under way.

“If earnings disappointments continue in India, the premium valuations may prove difficult to sustain. Net, we remain overweight India as we want to play the upcoming recovery and benefit from impact of the previous year’s policy measures,” he wrote in a December 6 note.

Bloomberg contributed to this story.