Economy and Business

A stretched market: On Indian stock indices hitting a new peak

The major Indian stock indices have rallied strongly despite lingering concerns over their historically rich valuations.

Apr 27, 2017
The major Indian stock indices have rallied strongly despite lingering concerns over their historically rich valuations. Both the BSE Sensex and NSE Nifty reached all-time highs on Wednesday, up about 13% and 14%, respectively, since the beginning of 2017 and well above the performance of developed markets. The Sensex surpassed its previous high to end the day at 30,133 while the Nifty settled on a record closing high of 9,351. Investors have attributed the rally to the better-than-expected earnings results of blue-chip companies (like Reliance Industries Limited that posted record earnings this week), strong fund inflows from foreign institutional investors (FIIs) and the strengthening of the rupee. Waning concerns over the election results in France, U.S. President Donald Trump’s anticipated tax reforms, and the allaying of concerns about the long-term impact of demonetisation may have also helped fuel the rally. FIIs have been at the centre of action over the past few months, turning into bullish buyers after the temporary slump in their investments after the demonetisation exercise. In the first three months of 2017, FIIs have poured $6.75 billion into equities, up from inflows of just $3.19 billion and $3.18 billion in 2015 and 2016, respectively. Adding strength to the rally, domestic investors have been net buyers of equities, investing almost ₹16,000 crore since the beginning of 2017.
 
Going forward, despite the willingness of foreign buyers to pay higher multiples, there remains the substantial risk of a downside attached to this rally. The market capitalisation of Indian stocks, according to a report by Motilal Oswal Securities published in March before the rally, rose 40% over the last year compared to a 21% increase in the overall world market cap. This increased India’s share of world market cap to 2.5%, marginally above the historical average of 2.4%. Yet corporate earnings, which determine equity returns in the long run, have been lacklustre despite showing early signs of recovery from the demonetisation shock. While the current earnings season has been modestly positive, overall, reasons to justify the high multiples remain elusive. The implementation of the Goods and Services Tax is expected to dampen earnings in the near term, and the absence of recovery in capital expenditure by India Inc. offers little hope to expect an earnings boost. The impact of the strengthening rupee on corporate earnings is another concern. Investors, especially foreigners who benefit from an appreciating rupee, have taken the strong rupee as a vote of confidence in the economy. But its likely impact on the earnings remains ignored. According to UBS, a 1% appreciation in the rupee could reduce the Nifty’s earnings by some 0.6%. All that said, the bears in the Indian markets have been proven wrong for long. It would not be surprising if investors stretch themselves further to support the rally.
 
Read More: http://www.thehindu.com/opinion/editorial/a-stretched-market/article18229844.ece
The Hindu, April 27, 2017

Leave a Reply

Your email address will not be published. Required fields are marked *

In northeast India, water-management practices to deal with climate change

In a small village on the north bank of the Brahmaputra in Assam in northeast India, farmer Horen Nath stood gazing at his partially submerged paddy field. The floods had kept their annual date but mercifully, the farmer said, the waters have started receding. "The weather has become very strange of late. We always had ample rain,

Read more...

IMF cuts India's growth projection, but it still retains world's top spot

The International Monetary Fund (IMF) cut India's growth projections for this fiscal year to 7.3 per cent and for the next to 7.5 per cent on Monday, although the country will still retain i...

Read more...
Tweets about SAMonitor
SAM Facebook