Overheated? Sensex surges to 11 month high, shrugs off concerns

By: | Updated: July 12, 2016 7:14 AM

Hits 11-month high; S&P 500, Nikkei too up

BSE Sensex brexit losses gainHigh-frequency indicators — factory output, the performance of the core sector and sales of cars and commercial vehicles — do not suggest a strong recovery is imminent. (Reuters)

Indian stocks soared to an 11-month high on Monday, in sync with the strong sentiment in global markets, shrugging off concerns the markets might be overheated. The benchmark Sensex hit an 11-month high of 27, 626.69 points in a near-500-point rally. The gauge tracked the mood in Asian markets which exulted after better-than-expected jobs data in the US and a win for Japanese Prime Minister Shinzo Abe’s party.

Ahead of earnings season in India and forecasts for a good monsoon, the Sensex has gained 20% since its February lows. Foreign portfolio investors are understood to have bought stocks worth $158 million on Monday, taking the tally for July to $214 million; in the four months to June, they have been buyers to the tune of $5.7 billion.

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The S&P 500, which had rallied to near record highs last Friday following strong jobs data, opened on a strong note on Monday, hitting a lifetime high in early trade. Bloomberg reported the dollar strengthened with industrial metals amid speculation the US economy remains strong enough to propel global growth without forcing the Federal Reserve to tighten policy. Earlier on Monday morning, the Nikkei rallied the most in four months on expectations Abe’s ruling coalition would continue to inject fiscal stimulus. Bloomberg noted global equities are almost back to where they were at the time of the UK’s June 23 vote to leave the European Union, which wiped almost $4 trillion off the value of the securities.

While the Street appears to be betting on better earnings on the back of a revival in consumption demand and agriculture, some analysts have cautioned the current level of prices captures it all.

Strategists at Kotak Institutional Equities believe the Indian market’s valuations have gone to uncomfortable levels on an overall basis and lofty levels for several sectors. “At such elevated valuations, it would be critical for earnings to surprise positively or at least meet with Street expectations. Otherwise, there will be a sickening realisation six to nine months later that valuations were actually even richer,” they wrote in a recent report. The brokerage notes its estimates for earnings growth are “certainly not conservative at about 19% for FY2016-18E”.

High-frequency indicators — factory output, the performance of the core sector and sales of cars and commercial vehicles — do not suggest a strong recovery is imminent. Moreover, loan growth has been sluggish with the bulk of the demand coming from individuals rather than companies.

In a results preview for Q1FY17, HSBC observed most state-owned lenders were expected to report slow loan growth while that for private banks would be better. “Slippages may come off sharply in 1QFY17, given substantial recognition of stress in FY16 and credit cost will remain elevated due to NPL ageing,” the brokerage wrote.

Nevertheless, investors appear confident the government will be able to continue with reforms and usher in the new goods and services tax law in the monsoon session of Parliament staring July 18. IT stocks gained on Monday with investors brushing aside concerns new US laws would hamper the ability of tech firms to procure enough H1B visas for their employees.

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