Markets continue record-breaking run; Sensex breaches 22,500 mark

Written by fe Bureau | Mumbai | Updated: Apr 3 2014, 08:57am hrs
Indian markets ended at record highs for a sixth consecutive session on Wednesday as a strong rupee supported the euphoria. The seven-week-long momentum in equities continued as the 30-share Sensex ended at a life-time high of 22,551.49, up 105.05 or 0.5%, albeit with increased caution on the Street as interest rate-sensitive stocks enjoyed strong buying interest. The rupee closed at 59.8975 against the US dollar, an eight-month high.

The Indian currency has seen a 4% appreciation this year on the back of a surge in capital flow into both equity and debt markets. The combined buying of foreign institutional investors (FIIs) in both the asset classes now stands at about $10.2 billion with their $4.1 billion of equity purchases being the highest in any Asian market.

As a result, India has emerged as the second best performing equity market in the EM peer group, with year-to-date gains of 10.2% in dollar terms.

Interest rate sensitives rallied a day after the RBI left key policy rate unchanged while taking a cautious tone on inflation .

Auto, bank and capital goods indices rallied about 1% each with the auto index touching an all-time high on the Bombay Stock Exchange.

BSE Banking and Capital Goods indices are the best performers this year, having rallied 18% and 11.8% so far, while the Sensex has gained 6.5%. Since mid-February, the Sensex has yielded close to 12% while these two sectoral indices have jumped more than 25%.

Shares of ICICI Bank, HDFC Bank, State Bank of India, Punjab National Bank and Bank of Baroda have rallied anywhere between 26% and 38% since the second week of February.

Punit Srivastava, ED, banking & finance, Daiwa Capital Markets, attributed the recent run-up in banking stocks, especially in the public sector banks, to a combination of a reduction in the overall stress in the industry and an improving macro-environment.

While the NPA cycle has not peaked yet, incremental fresh bad loans are coming off, especially in the case of PNB and BoB. However, one should be a bit cautious, given that growth a key variable is still some way off and the (impact of) the election outcome cant be totally discounted, said Srivastava.

In fact, a section of the Street appears to have turned cautious on the rallying cyclical stocks. JPMorgan has warned against chasing low quality financials and investment cycle related names, citing the nature and extent of challenges facing the economy.

Credit Suisse, meanwhile, questioned if the Indian market has become overvalued and overcrowded after the run-up.

In a strategy note, the foreign brokerage, which holds India as the second biggest overweight market, said that while it may not be the time yet to book profits, it is closely watching valuations in terms of rolling 12-month net foreign buying as a percentage of the market cap.

Comparing Indian markets price-to-book ( PBV) reading versus its return-on-Equity (RoE), it noted that the valuation premium relative to the Asian region has risen to 31%, similar to the highs seen in September 2010.

But unlike 2010, our view is that the ROE today is close to a trough with elections acting as a catalyst, said the note by analysts, Sakthi Siva and Kin Nang Chik.

After the latest run-up in the Sensex, the index valuation (in terms of trailing price-to-earnings multiple) has now converged with its long-term average of 17.7.

Valuation of most Nifty companies have enhanced. Several metal and capital goods stocks which have rallied the most among the top-50 bluechips, meanwhile, are trading at a 15-20% premium to their six-year average trailing price-to-earnings multiple.

Even after taking a backseat in the latest market rally, consumer companies continue to trade at steep premiums to their past average valuations, thanks to sharp advances made in 2013.

The rupee-driven IT and pharma pack, meanwhile, have maintained their premium valuations even after losing 3-7% in the run-up since mid-February.