Nifty50, Sensex scale 52-week highs: 5 factors driving this rally on D-Street

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NEW DELHI: Equity benchmarks Nifty50 and Sensex on Thursday reclaimed fresh 52-week highs of 8,992.50 and 29,133.44, respectively, led by gains in Tata Motors, RIL, ICICI Bank, HDFC, and L&T.

The Nifty50 is now at kissing distance of its all-time high of 9,119 hit on March 4, 2015. The index is up over 700 points, or 9 per cent, so far in calendar 2017.

Going by the buzz on Dalal Street, here is a list of top five factors that could be contributing to the strength in the market.

Dow at 21K: Global cues, especially from the US, are very important in determining the direction of the equity market back home. The US markets created history yet again in 2017 after Dow Jones rose past 21,000 for the first time in overnight trade.

The dollar jumped the most in six weeks and Treasuries fell as investors grew confident that global economic growth is accelerating and clearing the path for higher interest rates in the US.

Strong domestic flows: Strong flows from retail investors via mutual funds have set the direction for the Indian market at a time when foreign institutional investors (FIIs) turned net sellers. The confidence of retail investors has grown stronger in last 12-18 months even though the market gave a flattish return.

Equity index Nifty50 has rallied a little over 9 per cent in absolute terms supported by strong domestic flows. DIIs poured in over Rs 14,000 crore in domestic stocks compared with FII outflow of Rs 4,500 crore since December 2016.

“Mutual funds have invested almost $20 billion in the last two and a half years and with strong domestic liquidity and strong emerging markets, India has also done well,” Akash Singhania, Deputy CIO (equities), DHFL Pramerica Asset Managers, told ET Now in an interview.

Better earnings growth: The December quarter earnings saw limited damage from demonetisation. Earnings of the Nifty50 companies grew 3.4 per cent on a year-on-year (YoY) basis compared with 4.9 per cent growth in the first half of 2017.

With the earnings momentum improving, most global investment banks expect valuations to sustain and the market to give high single-digit to low double-digit returns over the next 12 months.

The Nifty50 is trading at a price-to-earnings ratio of 22 times on a 12-month trailing basis, higher than the five-year average PE of 18.7 times.

Morgan Stanley has raised its FY2019 earnings growth expectation for the Sensex from 15 per cent to 24 per cent, as it has embedded higher margins for corporate India going into an upcycle.

Morgan Stanley’s broad market earnings CAGR for the next two years is at 17 per cent. It has also raised margin forecast from 19 per cent to 20 per cent for BSE Sensex.

Better macro numbers giving confidence: India seems to have braved the effects of demonetisation with the economy growing at an unexpectedly robust 7 per cent in what was deemed to be the worst-hit October-December quarter. The nation is now projected to achieve 7.1 per cent growth in the year to March.

The strong GDP numbers have reduced fears about the demonetisation impact on India. Moody’s Investor Service expects the note ban done in November to be credit positive for the country adding that the worst of liquidity crunch has passed, which should support a rebound in consumption and investments.

“The government has been putting in lot of efforts and that is the reason why we saw a good GDP growth number for December quarter. We should be in good times going ahead,” Amit Nigam, Head of Equity at Peerless Mutual Fund, said in an interview with ET NOW.

“The short-term worries were that valuations seem to be slightly on the higher side, but not something that we are too much worried about. It is slightly on the higher side but not too much to be worried about,” he said.

The Nifty is trading at a price-to-earnings ratio of 22 times on a 12-month trailing basis, higher than the five-year average PE of 18.7 times.

Technical take: Snapping a two-day losing streak, the Nifty50 has defended the lower end of the recent trading range and recovered sharply. It made a small bullish candle on the charts on Wednesday.

The index has to hold above the 8,900 level to continue its upward move towards 9,000 and then 9,119 levels, while on the downside, multiple supports are seen at 8,888 and then 8,820 levels.

“A decisive move above 9,010 is required for gaining further momentum on the upside, while immediate support is placed at 8,860. The stock specific theme is likely to be in action,” Amar Ambani, of IIFL Private Wealth said.