REUTERS - A landslide election victory for Modi’s Bharatiya Janata Party in Uttar Pradesh and the dovish tone set by the U.S. Federal Reserve took Indian markets higher for the second straight week.
FIIs, which turned net buyers in February after four months of being net sellers, turned more aggressive in the last few days -- pumping in about $2.45 billion in the current month. However, domestic mutual funds turned cautious and were net sellers for the month.
The Nifty edged higher by 2.6 percent to close at 9,160 led by gains in Adani Ports, Bhel, Tata Steel, ITC and HDFC. Idea Cellular and Bharti Airtel were the top losers among the index pack. The rupee posted its highest weekly gains in a year, climbing 1.8 percent to 65.41 against the dollar.
As expected, the U.S. Federal Reserve hiked rates by 25 bps. It maintained a dovish stance by projecting two more rate hikes for the rest of the year.
Market participants were expecting a significantly more hawkish outlook and some indication of an accelerated pace of tightening.
Thus, equity markets reacted positively, the dollar plunged and gold gained. The Fed maintained its view that interest rate increases will be “gradual” and that policy “remains accommodative.”
One needs to see whether the Fed turns hawkish when the Trump administration begins to implement its fiscal policies. Meanwhile, China hiked rates this week while Britain and ECB policymakers hinted at higher rates, confirming that growth could be well on track globally.
The Goods and Services Tax (GST) has now come a step closer to becoming reality. The council has now approved five crucial laws.
It also fixed the upper cap on the cess to be levied on luxury goods, allaying markets fears as the proposed specific cess on cigarettes is 6 percent lower than the current tax rate. This led to a rally in ITC, which has a significant weightage of about 7 percent in the Nifty.
In stock-specific action, aviation stocks gained on expectation of a final decision on the regional connectivity scheme by the end of next week. Softer oil prices are also positive for the sector, but capacity constraints at major airports such as Mumbai and Delhi could stunt growth.
The State Bank of India (SBI) was also in the limelight after it announced it has offered a one-time settlement for stressed farm equipment loans.
The SBI is offering to take a 40 percent haircut on stressed tractor and farm equipment loans in a one-time settlement scheme that will run till March 31. Loans to the agricultural sector including crop loans, accounted for a little over 8 percent of its loan book.
On the macro front, CPI inflation edged up to 3.65 percent in February, broadly in line with market expectation, although WPI inflation rose 6.55 percent against consensus expectations of a 5.9 percent increase. The sharp uptick in WPI was partly due to a base effect and also due to the higher prices of fruits and vegetables.
In a bullish market, one tends to ignore all negative cues. Market movement in the short term reconfirms that nothing can go wrong. Although voters seem to have given a thumbs-up for demonetisation, the pain at the ground level continues for the unorganised sector.
We may be moving towards a more compliant society, which should be good in the long term, but markets are not discounting the disruption it would cause in the short-to-medium term. GST implementation may also lead to disruption for about two quarters.
For the coming week, there are not many meaningful triggers for the markets and we can expect consolidation. On the global macro front, U.S. initial jobless claims will be released on Wednesday.
With the recent sharp run in equities, the forward PE ratio of the Nifty has edged higher to 20x as compared to the historical average of 17.8x, confirming that markets have become overtly expensive and are entering into a bubble zone.
If the IT and pharma sectors with a weightage of about 20 percent in the index had performed, the PE ratio would have further got skewed. The optimism by retail investors is a case in point. DII investments which are a proxy to retail investments had hit a record high of $17.9 billion in 2016.
We could see continued exuberance for a few more sessions, but finding stocks with meaningful valuations is getting difficult. Thus, we could see a lot of action based on momentum in specific stocks. Although many may argue that this time the story is different, history tends to repeat itself and when the markets correct, one could lose profits as well as initial capital.
(Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant)