Sensex rises 311 pts, ends above 35,000 for first time
STOCK TAKING Hopes of earnings recovery, govt’s fiscal measures aid rally MUMBAI:
Indian stocks crossed new milestones on Wednesday on hopes of an earnings recovery and the government’s efforts at limiting a fiscal slippage in the current financial year. High crude oil prices and interest rate hikes by foreign central banks remain key risks to rising stock prices.
The benchmark Sensex closed at 35,081.82, up 310.77 points or 0.89%. The National Stock Exchange’s Nifty ended at 10,788.55, up 88.10 points or 0.8%.
Early Wednesday, the government said that it only plans to borrow an additional ₹20,000 crore (more than its budgeted target for this fiscal), down from ₹50,000 crore announced earlier. That has given markets hope that the fiscal slippage will be limited this financial year. The fiscal deficit stood at 112% of the budget estimate for 2017-18 at the end of November. There are also worries that government might stray off the fiscal consolidation path in its last budget before the general elections in 2019.
The abatement of some of these worries along with optimism on an earnings recovery continued to pull in money. Analysts are expecting the first signs of a rebound in corporate earnings growth in the December quarter owing to the favourable effect of a low base a year ago and higher consumer spending in the festive season.
Those expectations have overriden concerns over high valuations. Currently, the Sensex is trading at 20.39 times expected earnings for the next 12 months.
The optimism about an earnings recovery hasn’t been translated into a significant change in earnings estimates yet. For fiscal 2018, earnings estimate for Sensex firms has been cut by 11.29% since April. For fiscal 2019, it is down 4.75%.
However, fund managers are reluctant to declare this rally has entered bubble territory.
“Liquidity is driving the markets. There are pockets of bubbles in selective small and midcap stocks. However, on a relative basis, large caps have a higher margin of safety. For such high valuations, it is imperative for earnings to catch up,” said Navneet Munot, chief investment officer at SBI Funds Management Pvt. Ltd.
Foreign institutional investors (FIIs) have bought Indian shares worth $278.65 million while domestic mutual funds and insurance firms have pumped ₹1,027.01 crore in this year so far. In 2017, domestic institutions bought Indian equities worth ₹90,834.80 crore and FII were net buyers of $8,014.48 million.
With December quarter earnings underway, the markets are eyeing the Union Budget. An increase in spending on rural, social and agricultural sectors will provide further legs to the rally, said experts. However, the introduction of a long term capital gains tax could act as a deterrent. Currently, India taxes only short-term gains (those accrued within a year).
While fund managers swear to the long term gains from buying equities, they didn’t rule out short-term disruptions from other factors. For one, crude oil price hovering near $70 a barrel levels can stymie an earnings recovery by squeezing margins. Secondly, global central banks are reducing their bloated balance sheets. That could leading to a reversal in foreign investor inflows removing some support for the stock rally.