Indian markets rally 50% from March lows

Mumbai: Despite on-ground challenges with the economy struggling to cope up with covid-19 led disruptions, Indian stock markets have rallied 50% from the lows touched in March, driven by strong liquidity flows.

Benchmark indices ended at a five and half month high on Tuesday with the BSE Sensex closing at 38,528.32, up 477.54 points or 1.26%. The Nifty closed at 11,385.35, up 138.25 points or 1.23%.

As robust foreign liquidity flows finds its way to Indian equities, benchmark indices Sensex and Nifty surged 50.27% and 51.58% respectively from the March lows making India one of the best performers in the period.

In dollar terms, Sensex gained 51.57% and Nifty jumped 52.91% while markets in China, US, Japan and Hong Kong have rallied 32.89%, 49.77%, 43.9% and 17% respectively from March lows till date.

Policy easing by global central banks to mitigate the health crisis has led to an overflow of foreign liquidity into emerging markets like India. The G4 central banks are expanding their balance sheets by 28% of GDP by end-2021 and the G4 and China economies are extending fiscal support of 17% of GDP in 2020. Foreign institutional investors have pumped in $8.39 billion after a massive sell-off of $7.8 billion alone in March in Indian shares.

However, Indian markets are still nearly 8% away from record highs hit in January this year.

“Global equities, including India, continued to move higher on hopes of sooner-than-expected availability of the coronavirus vaccine as well as better-than-feared corporate earnings. The Nifty Index gained over 4.6% in the past four weeks and outperformed its key regional peers with MSCI Asia excluding Japan gaining over 2.3%,” said Credit Suisse Wealth Management India.

BSE Midcap and BSE Smallcap have seen an even better performance. From March lows, BSE Midcap gained 50.92% while BSE Smallcap surged 59.52%.

The sharp rally, however, has raised concerns that valuations have become expensive even for mid-cap companies.

“However, with major central banks keeping near-zero interest rates, equity valuations could remain elevated, in our view. Interestingly, Indian corporates have managed to successfully raise equity capital, which helps to de-lever balance sheet, instill confidence and aid growth,” said Credit Suisse Wealth Management India.

Sectorally, healthcare, auto, IT and metal indices have led the rally with gains of 47-59% from March lows.

Polarisation in the stock rally is another area that concerns analysts.

“Polarization remains the persistent theme – the top-15 stocks within the Nifty-50 are reflecting Nifty levels of 15,000 while the next-35 stocks are languishing near the 8,400 levels. In an era where growth is scary, we believe such polarization and divergence may persist till earnings see broad-based recovery. Thus, we continue to believe that any further upside from here would now rest on the inter-play of the Health crisis and speed of demand recovery,” analysts at Motilal Oswal Financial Services Ltd said.

India volatility index (VIX) or the so-called fear index has also cooled off drastically since March. Fall of the VIX of about 69% hints that fear and anxiety of future correction in stock markets is ebbing. The volatility index typically has an inverse correlation with benchmark indices.

Other competing asset class gold prices gained 37.62% with the precious metal hitting record high above ₹50,000 per 20 gm in July.