3 min read.Updated: 31 Jul 2018, 09:32 AM ISTAmi Shah
While wealth managers and analysts believe the rally will continue in the near term, they are not sure how long it will continue in the current state
Mumbai: Even as the benchmark Sensex and Nifty cross new highs, this rally is strikingly different than the previous ones. With unsettled macroeconomic situation and a handful of stocks driving the benchmark indices up, the euphoria and confidence in the rally is missing for the medium term.
While wealth managers and analysts believe the rally will continue in the near term, they are not sure how long it will continue in the current state.
BSE’s benchmark Sensex rose as much as 0.53% to a new record high of 37,533.50 points on Monday, while the National Stock Exchange’s Nifty climbed as much as 0.44% to a fresh record of 11,328.10 points.
Data shows that all rallies in Sensex in the last few years had pulled along with it the mid-cap and small-cap indices, and the broader market as well. But the trend is missing this time.
While the Sensex added 4.05% in the past six months, BSE MidCap and SmallCap indices shed 9.27% and 12.36%, respectively, in the same period. The broader BSE 500 index is down 1% as well. The BSE 100 and BSE 200 managed to notch 1% and 0.44% gains, respectively.
In comparison, when the Sensex hit record highs in January this year, July 2017, February 2017, February 2016, July 2014, all these indices—BSE MidCap, BSE SmallCap, BSE 100, BSE 200 and BSE 500—logged gains in the six months preceding such record high levels for the main index.
“The market rally in the last few months has been marked with very poor breadth, in the US and India," said Shankar Sharma, vice-chairman and joint managing director of First Global Securities Pvt. Ltd.
“This is a cause for some concern," Sharma said in an email interview from Dubai. He believes that the current rally will sustain for sometime as other emerging markets have been hit for various reasons.
This is also similar to the rally driven by FANG (Facebook, Amazon, Netflix and Google, which is now Alphabet) stocks in the US. It poses a big threat to the rally just like the Facebook stock corrected sharply in the US market.
Since Thursday, shares of Facebook have slumped about 20% after the social media company fell short of projections on revenue and global daily active users in the June quarter, and it also struggled with fake news scandals and data leaks.
Talks around global trade wars have also unnerved investors, but recent silence around it has been soothing.
That said, India’s macroeconomic situation was also not very promising. Crude prices are around $75 a barrel, weighing on Asia’s third-largest economy which imports 80% of its crude oil needs. The rupee fell to its lowest level of 69.13 against the dollar on 20 July. Since then, it has recovered 0.65%.
The ray of hope is the recovery in corporate earnings.
Early trends from corporate earnings for the June quarter indicate a revival in consumption demand and business sentiment, as the economy recovers from the lingering impact of the roll out of the goods and services tax (GST).
“Of late, apart from the usual stocks that were driving the market up, we have seen the earlier non-performers such as corporate lenders participating in the rally due to specific positive developments in certain sectors and stocks. That is a good sign," said Sanjeev Prasad, managing director and co-head of Kotak Institutional Equities.
In a phone interview from Singapore, Prasad pointed that we have seen a “quality" rally across the globe over the last one and a half years or so.
“People were willing to pay a premium for good quality stocks, regardless of valuation. We saw that in the FANG rally in the US too," Prasad added.
“While earnings are expected to be good and low fresh slippages have soothed sentiment for some stocks such as corporate lenders, we need to look at company-specific earnings to see how much of the growth is due to a low base," Prasad warned.
Vaibhav Sanghavi, co-chief executive officer of Avendus Capital Public Markets Alternative Strategies LLP, said the rally may continue for a bit for now with the chatter around global trade war cooling off since a few days.
“There is a decrease in the amount noise around trade wars. Emerging markets at large are seeing some stabilisation in foreign fund flows. Dollar has seen some stability as well," said Sanghavi, adding that these could also help the Indian markets continue their momentum.
However, the bigger issues lingered, and a close watch on global developments was essential.
“How long will the constitution of this rally in Indian markets continues, we don’t know," said Sanghavi.
“We need to watch Fed policy and how the dollar fares. We need to watch out for global developments very closely," he added.
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