Mumbai: India’s Nifty index closed at a lifetime high on Monday, riding a wave of liquidity that lifted global markets from Australia to the US, ahead of a key meeting of Federal Reserve officials.
Expectations that the Fed will leave rates unchanged and an unwinding of tensions over North Korea’s provocative missile tests helped investor sentiment.
The National Stock Exchange’s (NSE’s) benchmark Nifty closed at a record 10,153.10, up 0.67%. The Sensex ended 262.72 points short of its lifetime high of 32,686.48. The 30-share index closed 151.15 points, or 0.47%, higher at 32,423.76.
“Liquidity is the key factor driving the market with strong inflows from domestic investors,” said Hemang Jani, senior vice-president, advisory, at brokerage Sharekhan, owned by BNP Paribas SA. “It’s not just about the valuations going up. With declining interest rates, options for investors are skewed, resulting in higher inflows into equities directly or through the mutual fund route.”
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The exuberance was fuelled by what’s happening around the world. South Korea’s Kospi and Hong Kong’s Hang Seng index closed up around 1% each ahead of the Fed meeting on Tuesday and Wednesday.
The US central bank is unlikely to raise interest rates this time after having already hiked rates twice this year. While the central bank is widely expected to keep the benchmark rate unchanged, more attention will be on whether officials announce a reduction of its $4.5 trillion balance sheet, Bloomberg reported.
The gradual pace of monetary policy normalization has played a role in boosting risk appetite to excessive levels, warned Claudio Borio, head of economics and monetary policy at the Bank for International Settlements, at the release of the institution’s quarterly review report on Sunday. “Another factor could be market participants’ belief that central banks will not remain on the sidelines should unwanted market tensions arise,” he said.
To be sure, the rise in Indian equities in recent times has more to do with the exuberance of domestic investors. While foreign institutional investors have been net sellers of local stocks in August and September, domestic mutual funds and insurance companies bought shares worth Rs33,148.19 crore this month alone. Provisional data from NSE shows that domestic investors invested a net of Rs775.61 crore in Indian shares on Monday.
Indian stocks have delivered the highest returns in Asia this year barring Hong Kong’s 28%. So far in 2017, the Sensex and Nifty have gained 21.77% and 24.03% respectively.
Investors such as Atul Bhole, who manages Rs8.34 trillion in assets at DSP BlackRock Investment Managers, is betting that an earnings recovery will happen by the third quarter of this fiscal year due to firms re-stocking inventory after the 1 July implementation of the goods and services tax.
This “will drive markets ahead”, he said.
This optimism, which seems to pervade despite economic growth slipping to a three-year low of 5.7% in the quarter ended June, has allowed investors to shrug off high valuations and earnings per share downgrades by analysts. Since the beginning of this fiscal, Sensex’s expected earnings for the current fiscal and the next have been cut by 9.7% and 4.98%, respectively.
The Sensex and Nifty are trading at 21.30 and 20.20 times their expected one-year-ahead earnings, at a premium to most other markets.
“The markets are factoring in corporate earnings growth followed by good monsoon and enhanced transparency with the implementation of different reforms,” said Arun Thukral, managing director & chief executive officer of Axis Securities Ltd. “Indian economy is at the inflection point to take off in coming years.”
Ami Shah contributed to this story