The Rational Behind Stock Market Boom

The Rational Behind Stock Market Boom

The Indian stock market on Tuesday reached two milestones: The benchmark surpassed the 36,000-mark — the latest 1,000-point gain coming in just four trading sessions and the 50 index ended above 11,000 for the first time. Both the indices gained a percent each after the International Monetary Fund (IMF) said India was set to regain the fastest-growing major economy tag in 2018-19.

The broader market, too, participated in the rally, with the gaining 1.1 percent. (FPIs) made their Rs 10-billion-plus daily purchase for the fifth day in a row. On Tuesday, bought shares worth Rs 12.3 billion, taking their monthly buying tally beyond Rs 90 billion.

Domestic institutions also purchased shares worth Rs 1.7 billion, the provisional data from stock exchanges showed. The in a report predicted the to grow at 7.8 percent and 7.4 percent in FY20 and FY19, respectively. In contrast, the economy will clock 6.7 per cent growth in FY18. Market participants say buoyancy in the Indian will continue in the near term thanks to easy global liquidity. Domestically, a revival in economic growth and corporate earnings will provide the impetus for the market, they say.

“The economic cycle seems to have bottomed out and we are likely to see an improvement in the macroeconomic indicators. We expect earnings to dramatically improve 15-20 percent over the next two years as corporate earnings return to normal with the bad news already priced in. This revival in earnings could also see the return of FPI interest in Indian and build in $8-10 billion of net inflows in 2018,” said Mahesh Nandurkar, India strategist, Banking stocks continue to be in the forefront of the rally as investors expect the lenders to benefit the most from the revival in the economy. The sectoral index for banking stocks in the BSE gained 1.6 percent on Tuesday.

Shares of SBI, India’s largest public sector lender, climbed 3.9 percent – the highest for any constituent. Shares of and closed three percent and 1.3 percent higher, respectively. Tata Steel, and were among the other top gainers, with each of them going up more than three percent each.

According to market analysts, the surging prices could be a headwind for the market over the next few months. This could shoot up the inflation and widen the has gained 25 percent in the past one year and is currently trading close to $70 a barrel. The level is still lower compared to its previous high of $140 per barrel in 2014, however, analysts caution that the macroeconomy could come under strain if oil price rises another $10 a barrel from the current levels. “Rising oil prices in the global put a lot of pressure on the Whenever the prices go up, the inflation shoots up and the also increases.

The current oil prices are looking relatively expensive, and in order to absorb the shock of rising oil prices, the government may have to do a balancing act by reducing excise duties so that it doesn’t impact the inflation,” said Deven Choksey, managing director, Broader also face headwinds as stock prices in this space have risen sharply despite lackluster earnings.

This has led to a surge in the valuations with the BSE mid and small-cap indices on the BSE currently commanding a price to earnings (p/e) multiple of 48 and 112 times, respectively. After beating for four consecutive years in terms of returns, the broader are already showing signs of underperformance. While the has rallied more than six percent during the year so far, the BSE mid and small-cap indices have only managed to go up by 1.4 percent and 2.2 percent, respectively.

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