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Mumbai: A tide of global liquidity and recent positive local macroeconomic data are lifting Indian stocks to their highest levels since early 2015. After Tuesday’s 1.5% gain, the Nifty breached the 8,900-mark for the first time in 18 months.

It ended Tuesday at 8,943 points, an 18-month high. The BSE’s bellwether Sensex closed at a 16-month high of 28,978.02.

Nine out of the 12 sectoral indices have yielded positive returns this calendar year as a spurt of liquidity washed across asset classes. The BSE metals index gained the most, up 36%, tracking gains in commodities. The oil and gas index was up for the same reason. The strong promise of consumption growth can be seen in both fast-moving consumer goods, or FMCG (13.6%) and auto stocks (23.8%).

India’s strong position as one of the fastest growing large economies has been a key reason for increased buying among foreign investors. The high on Tuesday came on the back of the August manufacturing purchasing managers’ index (PMI) reaching a 13-month high. Earlier, the services PMI hit a 42-month high.

As a result, foreign portfolio investors are net buyers by $6.1 billion so far this year.

So, is this an indicator of a fundamental pickup?

While the June quarter earnings were a mixed bag, the pace of downgrades has slowed and analysts expect earnings to improve.

According to Ridham Desai, managing director and head of India research, Morgan Stanley (India), companies have been enduring their deepest earnings drawdown of the past 20 years, burdened by weak growth, high and rising interest costs, with excessive private sector debt; and overcapitalized balance sheets.

This has made the market look expensive. The Sensex is valued at 16.7 times its earnings over the next 12 months, according to Bloomberg data. In comparison, the MSCI Emerging Markets index is currently at 12 times earnings. But Indian stock valuations are also high because earnings are expected to pick up.

“The earnings trough has passed," said Desai in a client note on 23 August. He expects earnings to pick up 16% over FY16-18.

A good monsoon, which is expected to help rural consumption, and the pay commission bonanza for government staff are likely to boost demand and lead to better earnings as well.

How does India compare vis-a-vis other emerging markets?

The rise could perhaps best be explained by what’s happening elsewhere. Other emerging markets have been doing exceptionally well, and India is running with the pack. India’s returns are middling when compared with the rest of the markets.

For example, Brazilian markets are up 37.41% since the start of this calendar year. The MSCI Emerging Markets index is up 14.54% from the beginning of the year. The Indian markets are lower than both. Russian markets were up 14.54%. Indonesia gained 16.96%.

India is also not the best performer even over the last three months with single-digit returns (8.79% on the Nifty) compared with 11.45% for the MSCI Emerging Markets index and 17.67% for outperformer Brazil.

But one factor to note is that most markets that have done better than India are commodity-driven ones. Last year, they were beaten down badly due to the correction in crude oil prices, but are now tracking commodity price gains.

How big a factor is a rate hike by the US Fed?

The cooling chances of a US central bank rate hike have helped the rally over the past few days. Poor jobs data that came out on Friday is expected to stay the Fed’s hand in its September policy meeting. However, a rate hike by December is not ruled out.

The markets can handle a lot of things but a Fed rate hike is not one of them, according to Ramesh Damani, member, BSE.

“I won’t expect the market to discount the next fed rate hike or see it dealing with it (rate hike) in a smooth manner. There will be some churn," he said. However, he believes such periodic corrections will be a part of a longer term trend upwards.

A 31 August Kotak Securities Institutional Equities Strategy report noted the recent emerging markets rally may be affected over the next few months as investors will pause to reassess the impact of a rate hike.

“The rally in EM (emerging market) bonds and equities may slow down (if not reverse) over the next few months," said the note authored by analysts Sanjeev Prasad, Suvodeep Rakshit and Sunita Baldawa.

What about volatility?

Volatility has been on the decline in recent times. In fact, the India VIX hit its lowest level this year of 12.75 on Tuesday. The volatility index is also sometimes called the “fear gauge". It is seen as a measure of how much volatility investors expect in the days ahead. A low value is generally seen to indicate a sanguine outlook.

Is this a bad time for retail investors to enter?

Ravi Sundar Muthukrishnan, co-head of research, ICICI Securities Ltd, said he expects the markets to do well in the medium to long term.

“It’s a liquidity-driven rally rather than one driven by fundamentals, (but) we expect earnings to improve further," Muthukrishnan said, adding that he has a one-year target of 9,600 on the Nifty.

Experts says corrections cannot be ruled out in the days ahead. However, there is value left in the market and such falls would be appropriate entry points for long-term investors. For instance, while mid-caps are trading at new peaks, many large company stocks are yet to hit their 2015 peaks.

Damani believes the markets are in the second stage of a long bull market. If a retail investor asks whether it is time to buy, the answer is still yes, according to him.

“Unequivocally," Damani said.

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