Lifetime highs: Markets on fire as recovery gains pace

By Urvashi Valecha

Indian benchmark indices hit a lifetime high on Monday buoyed by strong global momentum and improving domestic economic data. Surpassing their January highs, the Nifty soared 197.5 points or 1.61% to close at 12,461.05 while the Sensex surged 704.37 points to end the session at 42,597.43.

Nonetheless, dollar returns from the Nifty are a negative 1.4% since January while the MSCI EM Index is now up by 5.54%. The Shanghai Composite has gained 17.01% while the Kospi and Taiwan TAIEX have gained 15%. The Hang Seng and Jakarta Composite have lost 7.3% and 16.2% respectively during this time. As an asset class, Indian equities have underperformed gold, which is up 29.08% in dollar terms.

Moreover, India is now way more expensive than its historical valuation with the Nifty currently trading at a shade under 20 times estimated FY22 earnings.

Strategists at Kotak Institutional Equities observed that while the outlook for the markets is positive due to several factors, including a positive surprise in Q2FY21 earnings, full valuations leave little room for complacency.
The focus, they noted, will be on economic and earnings recovery. “In our view, stock prices largely factor the ongoing recovery in economic activity post the ‘unlock’ phases. The reward-risk balance is less favourable post the sharp run-up in stock prices but economic recovery and low global and domestic bond yields may support valuations,” they wrote.

Foreign portfolio investors (FPIs) have been buyers in 2020 with net inflows hitting $8.5 billion since January; in March they had pulled out $8.3 billion. Domestic institutional investors buyers in have pumped in Rs 37,326 crore since January though they have been sellers in the last three months. The Nifty Bank was up by as much as 2.7% on Monday but it is still about 18% below its all-time highs. Investors believed banks would be among the most-affected sectors owing to loan moratoriums and the economic stress but post the September quarter earnings the outlook has changed.

Jefferies wrote that the US election driven trends could imply that Indian IT stocks could gain traction and that cyclical stocks, including banks, might lag. “We believe that such a rotation could be tactical in the Indian context and not a long-term trend. As the Indian economy’s growth picks up pace, banks would become a good proxy on India’s growth recovery theme,” the brokerage observed.”