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Markets touch two-year highs; some analysts see a pullback

Nifty crosses 6,000 in intra-day trade; experts say surge driven more by foreign inflows than fundamentals
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First Published: Wed, Jan 02 2013. 10 46 PM IST
The third-quarter earnings season that begins in the second week of this month will be closely watched for cues to how the market could behave. Photo: Hemant Mishra/Mint
The third-quarter earnings season that begins in the second week of this month will be closely watched for cues to how the market could behave. Photo: Hemant Mishra/Mint
Updated: Thu, Jan 03 2013. 12 38 AM IST
Mumbai: India’s benchmark stock index, the 50-share Nifty, went past 6,000 points in intra-day trade on Wednesday for the first time in two years, joining the rally in global markets after US lawmakers approved a plan to end the country’s so-called fiscal cliff crisis.
Some stock market experts, though, were uncertain if the rally can sustain, explaining it was driven more by foreign money flowing into Indian markets rather than by fundamentals.
Interest rate-sensitive stocks such as automobile companies and banks led the gains in Wednesday’s trade as expectations gained momentum that the central bank will in its third-quarterly policy meet on 29 January cut rates by 25-50 basis points, or 0.25-0.50 percentage points.
The National Stock Exchange’s Nifty hovered around 6,000 points for most of the trading session, rising to a high of 6,006.05, but pared some gains to close at 5,993.25, up 0.7%. The Nifty is now 363.85 points, or about 6%, away from a record 6,357.10 points it touched on 8 January 2008.
Benchmark Sensex gained 0.68% to end at 19,714.24 points on Wednesday.
Globally, equity markets gained on Wednesday after US President Barack Obama pushed through a controversial deal preventing tax increases for most of the population and spending cuts by the government, which threatened a recession in the world’s largest economy.
“It is all hope and liquidity that are driving the market,” said Arun Kejriwal, founder of Kejriwal Research and Investment Services Ltd, a brokerage. “We may record new highs, but sustaining those levels is going to be a problem.”
“We believe that the slowdown in economic/earnings growth has bottomed out and the recent momentum on policy front should provide a boost to growth in 2013,” Sukumar Rajah, managing director and chief investment officer, Asian equities, Franklin Templeton Investments, said in an email interview. “Given the expected improvement in the overall environment, there is scope for margin expansion and earnings growth over the next 3 years.”
Emerging markets were the focus of investment managers across the globe in 2012.
Total emerging market equity funds had net subscriptions of $49 billion (around Rs.2.6 trillion) from the start of 2012 to 19 December, data from JP Morgan show. This was after a significant rebound from $34 billion redemptions in 2011.
India is a key beneficiary of the flows diverted to emerging markets. Foreign institutional investors, or FIIs, pumped in around $24.5 billion in 2012, data from the Securities and Exchange Board of India show. The high inflows came after a dismal 2011, when FIIs were net sellers. On the contrary, domestic funds were sellers in 2012, dumping around Rs.56,911.8 crore of Indian equities.
But too much reliance on foreign money makes India vulnerable to global risks.
“Likely as it might seem, a positive spin to the India story is unfortunately not a given. A number of factors that could work against this (the domestic equity market) include below potential growth locally, delayed global recovery, China-led commodity inflation, further pain on the rupee and populism in a pre-election year,” Religare Capital Markets analysts Tirthankar Patnaik, Prerna Singhvi and Saloni Agarwal said in a 1 January note. Yet, according to market experts, there is hope that economic growth will pick up and a recovery could be in the offing—although stretched over a period.
While India is one of the fastest-growing major economies in the world, its gross domestic product grew by a modest 5.4% in the first half of fiscal 2013, much slower than the 7.3% pace registered in the year before.
The third-quarter earnings season that begins in the second week of this month will be closely watched for cues to how the market could behave.
And while many market participants expect the Reserve Bank of India (RBI) to soften rates later this month, if the central bank opts to hold rates the equity market could see a sell-off, they said.
“The rate cut expectation is also critical as the market has taken the same for almost granted. If the RBI governor fails to oblige, the selling could be severe,” said K. Subramanyam, assistant vice-president, institutional sales, at Asit C. Mehta Investment Intermediates Ltd. “Besides this, Budget noises will also dictate market movement and this could add to the volatility.”
Some analysts fear the federal Budget for 2013-14, likely to be presented in February—the government’s last Budget before the general election in 2014, could end up being populist and reforms and market growth may take a back-seat.
The Religare analysts said that while populist announcements are likely to get strident towards the second half of the year, a fiscally prudent Budget, action on pending legislation like the insurance and pension Bills, clarity on coal linkages, and managing the fuel and fertilizer subsidies are among key measures that could assuage market sentiment and invite capital inflows.
“Sentiment in the year ahead will be shaped by politics ahead of elections (along with implementation), monetary policy direction, economic trends and global policy actions,” said Rajah of Franklin Templeton. “An important theme to monitor next year will be trends in domestic investment activity along with the rising trend of social discontent regarding governance.” The equity markets could see a potentially steep rise in public share sales this year, as promoters of companies attempt to cash in on a likely rally. Many companies have outlined plans for initial public offers this year. Apart from this, the government is likely to divest its stakes in some public sector companies.
Tyre Corp. of India Ltd, Hindustan Copper Ltd, Steel Authority of India Ltd, Rashtriya Ispat Nigam Ltd and Bharat Heavy Electricals Ltd are up for share sales, according to the disinvestment ministry’s website. Separately, government officials have mentioned plans to divest stakes in Oil India Ltd, Hindustan Aeronautics Ltd, National Aluminium Co. Ltd, NTPC Ltd and MMTC Ltd.
The Nifty previously reached the 6,000 mark two years ago, on 6 January 2011. UltraTech Cement Ltd has been the best performer since then and the share price has more than doubled to Rs.2,036 apiece. Consumer goods companies Hindustan Unilever Ltd and ITC Ltd have gained 65.3% and 59.6% over the period. Financial stocks too have been big gainers.
State-run Bharat Heavy Electricals Ltd has been the biggest loser, having lost 48.5% of its market value since 6 January 2011. Mining and metal companies as a cluster have suffered the most since then. Jindal Steel and Power Ltd, Tata Steel Ltd, Sesa Goa Ltd and Hindalco Industries Ltd have lost 35-47% over the past two years.
Vyas Mohan contributed to this story.
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First Published: Wed, Jan 02 2013. 10 46 PM IST
More Topics: Nifty | FIIs | inflows | emerging markets | Sensex |