Mumbai: Indian stock indices scaled new lifetime highs on Monday, riding the coat-tails of a worldwide rally in equities. Analysts expect the rally to continue, but caution that any negative surprises in the 1 February budget or worse-than-expected corporate earnings could cut it short.

On Monday, the BSE’s 30-share Sensex closed at 35,798.01 points, up 286.43 points, or 0.81%. The National Stock Exchange’s 50-share Nifty closed at 10,966.20 points, up 71.50 points, or 0.66%.

The Sensex has risen 5.11% and the Nifty 4.14% so far this year. That compares with the MSCI Emerging Markets Index’s gains of 6.34% (till Friday) and the MSCI World’s 4.88%.

“The markets are currently driven by liquidity. Emerging markets have started attracting flows in this year and India is a beneficiary of the flow," said Atul Bhole, vice-president, investments, at DSP BlackRock Investment Managers.

Bhole cautioned that markets are wary of the likely reintroduction of a long-term capital gains tax in the budget, which could short-circuit the rally in equities. 

So far this year, foreign institutional investors have bought Indian shares worth $993.16 million as part of a worldwide increase in equities allocation. A Bank of America-Merrill Lynch fund managers’ report on 16 January showed equity allocation at the highest level since March 2015.

“The markets are expected to rise further with no immediate negative triggers. However, lately, the rally is driven by a handful of stocks and is not broad-based. There will be more legs to the rally if no unfavourable or negative announcement is made in the budget," said Deepak Jasani, head (retail research) at HDFC Securities Ltd. 

Expectations of a recovery in corporate earnings is also driving sentiment. That, along with an expected rise in consumer demand following two years of good monsoon rainfall, will sustain the rally, said Rahul Shah, vice-president (equity advisory group) at Motilal Oswal Securities Ltd.

Early trends in December quarter corporate earnings indicate a revival in business growth following a downturn in the aftermath of the November 2016 invalidation of high-value banknotes and the July 2017 implementation of the goods and services tax.

According to data provider Capitaline, growth in net profit after adjustment for one-time items of 103 BSE-listed firms which have reported earnings so far jumped to a 13-quarter high, rising 23.02% year-on-year in the December quarter, compared with 4.92% in the preceding three months.

Still, others say that it is too early to call a recovery in earnings. In the absence of robust earnings, stock valuations will become more expensive.

Currently, the Sensex trades at 19.23 times its expected earnings over the next 12 months. That not only makes it one of the costliest benchmark gauges in the world, but also expensive compared with historical averages. On 97% of trading days since 1 January 2007, the Sensex’s price-earnings ratio has been less than 19 times. The expensive valuations have prompted some analysts, such as those at Ambit Capital Pvt. Ltd, to call this the last phase of the bull market after a “final frenzy".

The securities house pointed out three reasons: One, equities have rallied strongly for a year following a pause in the final months of 2016 and history shows that bull markets last for two years after a pause.

Second, it said some top sectors of the markets see valuations skyrocketing in the final stages of the bull market. It gave the example of the financials sector, where the price-earnings multiple has gained 4 times since the beginning of the rally.

Finally, it pointed to trailing (over the last 12 months) price-earnings multiple of the whole market, which has increased.

“We are in the final stages of the bull market," said the 22 January report.

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