Nifty hits record high, Sensex surges nearly 200 points; 5 factors fuelling this rally

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NEW DELHI: The NSE barometer Nifty50 hit a fresh all-time high of 9,152.90, while BSE’s benchmark Sensex rallied nearly 200 points after the US Federal Reserve in its overnight policy review hiked interest rate by 25 basis points, but signaled that further rate hikes would be gradual.

Nifty Bank, Nifty Midcap and Nifty Smallcap indices too hit their record high levels. Dollar tumbled, while global equities surge.

At 10 am, the Nifty50 was trading at 9,141, up 56.55 points, or 0.62 per cent. The BSE Sensex was up 190 points, or 0.61 per cent, at 29,587. Midcap and Smallcap indices rose up to 0.8 per cent.

“We would continue to remain upbeat on market and expect the Nifty to keep marching higher, first towards 9200 and then towards our near term target of 9400 – 9600 (price extension of previous up move from recent low of 7893.80) over the next few weeks,” said Sameet Chavan, Technical Analyst at Angel Broking.

Here are top five factors which can be attributed to Thursday’s sharp upmove:

Fed said that its view on neutral nominal federal funds rate– the interest rate which is neither expansionary nor contractionary; and keeping the economy operating on an even keel — is currently quite low by historical standards.

“That means that the federal funds rate does not have to rise all that much to get to a neutral policy stance. We also expect the neutral level of the federal funds rate to rise somewhat over time, meaning that additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion,” the Fed statement said.

The Fed Reserve key short-term rate will go up by a quarter-point to a still-low range of 0.75 per cent to 1 per cent.

Meanwhile, Fed said it made no decision on re-investment policy. Cleveland Fed President Loretta Mester last month noted that the Fed may focus on returning to a more normal policy footing, including trimming its $4.5-trillion bond portfolio.

Adrian Mowat, Chief EM & Asian Equity Strategist, JP Morgan noted that Fed rate increased from 1 per cent in 2004 to 5.25 per cent in 2006, but during that period the emerging market equities did very well.

“A central bank normalising rates is a positive message for growth risk assets and I am glad that we will got to that stage because it was getting a little bit say tedious to talk constantly about the Fed from 2008 onwards for when they start to move rates and what would that actually mean. India was one of the best performing markets in the 2011 to 2015 bear market in EM,” said Mowat who is neutral on India

FPI pumping dollars into India, retail investors bullish

Data available with depository NSDL showed that FPIs have pumped Rs 14,282 crore into domestic equities so far this month. This was against Rs 9,902 crore inflows domestic stocks receive in the previous months. The institutional category was net seller in four months to January.

Last three months of last calendar year saw FPI selling and from January to February that turned a bit. Now if there is an increased interest coming into emerging markets. Retail flows too have been high.

“We have seen FIIs appreciating India’s ability to carry out complex programmes like demonetisation and also the entrepreneurship of India so clearly sentiments are today positive for India. Besides, domestic flows are coming in quite wholeheartedly. There are more than 1.2 crore Indians doing SIPs in equity mutual funds giving up about 4000 crore a month. The EPFO has also talked about increasing their allocation to equity. Domestic flows from insurance companies, mutual funds, EPFO and new pension scheme as well as retail and HNIs is at all time high level in terms of absolute amount. Flows and sentiment are pushing markets higher,” said Nilesh Shah, MD at Kotak AMC.

Valuations rich, so what?

Porinju Veliyath, Equity Intelligence India told ET Now that there may be a steady uptrend in the market and that more money will flow into equities.

“You know mutual funds are going…heading for great times, the Indian public domestic savings which we always used to discuss earlier the households savings is going to come in a big way into equities. That will keep valuation of Nifty and Sensex richly valued. People cannot expect the Nifty PE coming down to reasonable levels at all. It will continue to be very rich expecting the future earning potential,” Veliyath said.

Jyotivardhan Jaipuria, Founder & MD at Veda Investment believes that as and when earnings recovers, worries about valuation will become a small issue.

BJP win

In Uttar Pradesh, the BJP won 312 seats, including some of the Muslim-dominated seats such as Chandpur, Moradabad Nagar, and Deoband. A BJP-Led coalition government is in power in Manipur and it has formed government in Goa. Analysts believe that the UP win has set PM Modi up for a win in the 2019 general election.

“The victory of BJP in the assembly elections increases the control of BJP in these states. The assembly election outcome also indicates that PM Modi still remains popular leader in the country, despite decisions like demonetisation. This clearly means that BJP remains a favourite to win the general elections in 2019. This gives BJP another 7 years to continue its pro growth policies. This will be positive for the country as it gives assurance of bring more reforms and also impart stability in the country. We believe that domestic equities are set to see higher inflows,” said Vaibhav Agrawal, Head of Research and ARQ.

There have been hopes that the stronger BJP would push for timely implementation of GST. This will help the economy recover swiftly. Earnings too may see a rebound in next couple of quarters, they said.

“”BJP’s emphatic victory in the politically-crucial state of UP would embolden the Prime Minister in aggressively expediting key structural economic reforms that have been hobbling India’s growth impulses. Mr Modi has achieved a golden mean by emphasising on economic reforms with equity-for-all as it’s fulcrum,” said Ajay Bodke, CEO & Chief Portfolio Manager -PMS, Prabhudas Lilladher.

“Though valuations remain expensive markets would pin it’s hope on recovery of as-yet tepid corporate earningsover the next few quarters and the passage of GST,” Bodke said