Mumbai: Indian markets rallied on Friday, riding on the tails of a global stock rally, amid hopes that the ruling Bharatiya Janata Party (BJP) will win the two-phase elections in Gujarat that kick off on Saturday.
The Sensex ended at 33,250.30, gaining 301.09 or 0.9%. The 50-stock Nifty closed at 10,265.65, up 98.95 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 Rs3,948.55 crore worth of stocks in December and Rs86,130.76 crore in 2017 so far.
Although it is a much closer fight than earlier expected, opinion polls show 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 5 December Credit Suisse note said.
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 holdings in recent times. FIIs have sold shares worth $485.32 million so far this month while they bought $8.37 billion this year. 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 earnings revival is just round the corner and 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 fiscal 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 underway. “If earnings disappointments continue in India, the premium valuations may prove difficult to sustain. Net, we remain overweight on India as we want to play the upcoming recovery and benefit from the impact of the previous year’s policy measures,” he wrote in a 6 December note.
Bloomberg contributed to this story.