Stock Market Rebound: Local factors driving the sentiment

On Thursday, the benchmark BSE Sensex rose 1.88 per cent or 485 points to close at over six-month high of 26,366.7.

Despite outflow from FIIs, the equity market continued its rally and experts say domestic factors are taking precedence over global events. DIIs invested a net of Rs 7,224 crore into the domestic equities, providing strength to the market. (Illustration: C R Sasikumar)

On Thursday, the benchmark BSE Sensex rose 1.88 per cent or 485 points to close at over six-month high of 26,366.7. While in February 2016, the Sensex fell below 23,000-mark to hit the levels at which it traded before Prime Minister Narendra Modi-led NDA came to power, the markets have witnessed a sustained recovery following better-than-expected corporate performance in the quarter ended March 2016, forecast of a good monsoon and a strong order book especially in sectors such as roads, railways, power and power distribution.

Even though several key events are lined up over the next couple of weeks such as Reserve Bank of India’ monetary policy meeting on June 7 and Federal Open Market Committee’s (FOMC) meeting on June 14 and 15, experts say that the market will be driven more by domestic news and data flow that are hinting towards an uptick in the economy rather than global factors. “While a global rally lifted the domestic markets earlier, the hopes of a good monsoon have further boosted the sentiments in the second half of the rally.

A good monsoon will not only spur the rural economy but will lift volumes for FMCG and other sectors. An above average monsoon will lift the sentiment and confidence for not one but two years,” said Pankaj Pandey, head of research at ICICI Securities. If hopes of a rate cut by the Reserve Bank of India in its forthcoming monetary policy meeting is something that the market is looking up to, the worries over rate hike by the Federal Reserve in the US have had a drag on the market over the last couple of weeks. The foreign portfolio investors who invested Rs 12,900 crore in the Indian equities and Rs 11,970 crore in Indian debt in first four months of calendar year 2016, slowed down their inflows into equities in May and turned net sellers in debt following concerns of a rate hike in the US.

But, despite the outflow from FIIs, the equity market continued its rally and experts say that domestic factors are now taking precedence over global events. While FPIs sold net investments worth Rs 6,100 from Indian debt, they invested only Rs 774 crore into Indian equities in May, the DIIs invested a net of Rs 7,224 crore into the domestic equities, thereby providing strength to the market. What is driving the sentiment For the first two years, economists and analysts have been trying to fetch and analyse data to see if the economy is witnessing an uptick on the ground and data inflow in the recent past indicates towards the same.

While there has been a sharp rise in the foreign direct investment especially in the services sector and the government has taken several steps on ease of doing business, data collated by Projects Today shows that over the last one year the project ordering amounted to over Rs 3 lakh crore and tenders have been out for projects worth over Rs 6.8 lakh crore. “The pipeline is very strong and this shows that there is a lot of activity happening on the ground, especially across roads, railways, power and power distribution.

If these projects get executed over the next four to five years, it will be a big driver for the economy,” said a market expert who did not wish to be named, adding that it is also giving market the confidence that the government’s intention are taking shape. CMIE’s (Centre For Monitoring Indian Economy Pvt Ltd) data on stalled projects also shows that there has been a sharp decline in the number of such projects due to lack of environmental and non-environmental clearances. According to the CMIE database, the cumulative impact of projects stalling on account lack of environmental clearance, lack of non-environmental clearances and raw material supply problems came down from 56 per cent in 2012-13 to less than 10 per cent in 2015-16.

Some say that as and when the demand comes back, the removal of bottlenecks will lead to faster investment. Market experts point that a good monsoon will lead to a rise in demand which in turn will be followed by private sector investment that has been one of the key concerns. A report issued by ICRA Limited expects a marginal uptick in growth of GVA (gross value added) at basic prices to 7.2 per cent in Q4 FY16 from the initial 7.1 per cent forecast by the (CSO) Central Statistical Office for Q3FY16.

“This follows from our expectation of a smaller drag emanating from the agricultural sector in Q4 FY16 on a sequential basis, both on account of a mildly improved performance and a lower weight in aggregate GVA in line with seasonal trends,” said Aditi Nayar, senior economist, ICRA Limited. She further added that if the expected uptick in GVA growth in Q4 FY16 materialises, it would be in contrast to the slowdown in growth recorded in Q4 relative to Q3 in the previous three fiscals. In another booster to investor sentiment in India, Morgan Stanley on Wednesday, upgraded its outlook on India to ‘overweight’ from an ‘equal weight’ rating.

While it did not give a target for the index, it said that India’s relative valuations have come off and also said that the macros are now turning positive. It also expected a 3 per cent earnings growth in FY16 and 14 per cent growth in FY17. Market participants feel that most negative catalyst seems to have priced in and markets are ready for the big move. Motilal Oswal, CMD, MOFSL, said that the March quarter results have seen more upgrades than downgrades, ex-PSU banks.

“Rain will play a big sentimental value….There is a plenty of money seating outside and waiting to see Nifty cross the 8,000-mark. Now that it has crossed, we will see broad markets move much aggressively,” said Motilal Oswal, CMD, Motilal Oswal Financial Services. Pandey, however, feels that the indices may not reflect a lot of gains in the market because of the drag on account of public sector banks. “There is bullishness across sectors and themes and stocks within such sectors will see a lot of activity,” said Pandey.

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