The rally in Indian stocks continues. On the first trading day of the new financial year, the benchmark Sensex and Nifty indices closed at record highs as global equities rode a liquidity wave.
While global risk appetite is high, monsoon rains and a recovery in corporate earnings, which will start flowing in two weeks from now, will be near-term triggers for Indian markets, analysts said.
Not only was the Sensex the best performer in Asia, Monday’s rally was market-wide, with broader indices such as the BSE 500 as well as mid-cap and small-cap stocks hitting record closing highs. Diverse sectoral indices such as consumer goods, power and capital goods reached 52-week highs as a survey showed that India’s March factory output grew at the fastest pace in five months.
The Bharatiya Janata Party’s landslide win in the Uttar Pradesh assembly election boosted market sentiment.
“Money is flowing in because recent state elections were a big booster,” said Gautam Trivedi, CEO of Religare Capital Markets Ltd.
“People are reading into it a potential win for the current government in 2019 general elections. This event has been a major positive from foreign investors’ perspective.”
Foreign institutional investors (FIIs) have been net buyers for 20 straight sessions to 31 March. In all of 2017, they have infused $6.2 billion in Indian shares.
On Monday, BSE’s 30-share Sensex closed 289.72 points, or 0.98%, higher at 29,910.22 points, a record close. The National Stock Exchange’s 50-share Nifty closed up 64.10 points, or 0.72%, at a record closing level of 9,237.85 points.
Goldman Sachs analysts expect the Nifty to reach 9,500 in 12-months and 10,200 by the end of 2018 as an earnings recovery gathers pace, driven by 12% and 15% profit growth this financial year and the next.
“Lower-than-expected demonetization impact on activity and earnings, tail winds from global reflation trade and recent favourable state election results have all helped fuel risk appetite, in our view,” the analysts wrote in a 30 March note to clients.
Part of the reason why returns may be capped in the near term are rich valuations. The Sensex is trading at 17.46 times fiscal year 2018 earnings and is at a high premium to the MSCI Emerging Markets’s price-earnings multiple.
“Valuation does look expensive. My guess is market may not go significantly higher from here. That said, downside also looks capped in the event of a negative development,” said Ravi Sundar Muthukrishnan, co-head of research, ICICI Securities Ltd.
“The only things that could bother the market are corporate earnings and monsoon. However, if the earnings are largely in line with expectations, markets should hold on to gains. Only if they are way off the mark, it could create some jitters in the market,” he added.
Private weather forecaster Skymet said last week that 2017 monsoon rainfall is likely to remain below normal at 95% of the long period average.
A weak monsoon could weigh on rural demand and impact corporate earnings as well. That might stymie the corporate earnings recovery that analysts are expecting in the latter half of the year.
