Local stocks also received a boost from investors covering short positions ahead of the monthly expiry of derivative contracts. Market participants do not foresee any big, immediate risks to the rally in light of continued inflows from foreign and domestic investors.
The BSE’s benchmark Sensex rose 448.39 points, or 1.48%, to a record close of 30,705.03 points. The National Stock Exchange’s Nifty index rose 149.20 points, or 1.59%, to 9,509.75 points, only 16 points away from a new record close.
“Expectation of continued improvement in earnings coupled with strong inflows are driving the market," said Harsha Upadhyaya, chief investment officer, equity, at Kotak Mahindra Asset Management Co. Ltd. “Earnings are in line or marginally better than expectations. Some of the drags are in sectors such as corporate-facing PSU (public sector undertaking) banks. To that extent, we may not see overall robust earnings growth."
Overall, earnings growth has remained tepid. For 201 non-financial, non-oil industry firms in the BSE 500 index, net sales improved 6.82% from a year ago in the quarter ended March and net profit rose 0.51%. With no sharp earnings upgrades, overall market valuations have run up too, as the chart shows.
But two factors are at play.
One, investors are taking an optimistic view on overall earnings growth, based on policy steps such as the implementation of the goods and services tax (GST) and an ordinance which empowers the Reserve Bank of India to intervene directly to help clean up the Rs9.6-trillion bad loan mess in Indian banking.
“We believe the government’s current measures are steps in the right direction," said Tanvee Gupta Jain, economist, UBS Securities India Pvt. Ltd, in a report on Thursday. “Despite the gradual and lopsided pace of recovery on the ground, we believe the ongoing structural reform push by the policymakers will help improve productivity dynamics and lay the foundation for sustainable growth."
GST is proposed to be implemented from 1 July. The tax reform is billed as the biggest the country has undertaken since independence.
“Things are improving on the macro front, with GST implementation on the horizon and with the bad asset resolution ordinance etc.," said Nirav Sheth, head of equities at SBICAP Securities Ltd. “Financial year 2018 looks better on the earnings front."
Sheth expects Nifty companies to report 17-18% growth in net profit in the current fiscal year.
Both foreign institutional investors (FIIs), who have infused a net of $7.75 billion in Indian shares in the year so far, and domestic institutional investors, with net purchases of Rs12,823.62 crore, have bought this view.
The second factor at play is that while earnings have been tepid at the macro level, leading to a sharp rise in company valuations, there are pockets of value in the market, say fund managers.
“At this juncture, while a shallow and sectoral correction in not ruled out, a sharp and sustained overall correction is not in sight," said Upadhyaya. “Stock picking is the key."
Elsewhere in Asia, China’s Shanghai Composite index gained 1.43% and Hong Kong’s Hang Seng index advanced 0.8%. South Korea’s Kospi rose 1.1% and Japan’s Nikkei 225 advanced 0.36%. European shares erased gains after trading firm in the first half. US stocks rose to fresh records in early trading on Thursday.
The Fed minutes showed policymakers were in agreement that they should hold off on raising interest rates until it was clear that a recent slowdown in the US was temporary.