A Stage Set for a Market Rally?

Tue, 14 Mar Pre-Open

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The Sensex closed at 28,970 on 10^th March 2017, just 4% off its all-time high of 30,024 on March, 04, 2015. But this rally feels different from the ones seen in the past. The current rally is surrounded by skepticism all round. This is in sharp contrast to the global markets. The S&P Index has closed at record highs 13 times this year in spite of investor's reservations regarding Trump's appointment.

On the other hand, the political situation in India seems to be on a stable ground. A landslide win for the BJP in UP, Uttarakhand firmly puts the centre government's focus back on the reform path. A majority in the Centre and State assemblies for the existing government is expected to fast forward reforms in the coming years. The government is keen on rolling out the GST from July 1 this year. A seamless implementation of GST across various sectors will provide further impetus to growth across various sectors.

Despite all this FII's have been net sellers since the start of January 2016. Most of the activity has been on the domestic front with DII's being net buyers since 2016. Compare this to the option prices on the global front and you get a very contrasting picture. Option prices on the global indices of US, UK, Japan and China all indicate a much more optimistic view of their markets.

The Indian GDP growth was projected at 7% for the fourth quarter of 2017.This is much higher than the modest economic growth expectation of 4.7% in Emerging markets. The Indian GDP growth estimate was much higher than expected considering the gloomy picture painted after demonetisation. Still, analysts are wary of any up move in the near term. Bank of America Merill Lynch sees near term returns capped from hereon due to rich valuations. It also feels the markets have under estimated the impact of demonetization in the coming few quarters.

One more thing going for the Indian markets is the wave of consolidation across sectors. Recent M&A activity in the telecom and banking sectors should help ease the burden of debt currently plaguing these sectors. This should ease the risks of earnings downgrades going forward. Corporate profitability of which has slumped over the past 5 years should also see an improvement. A combination of decreased debt and increased profitability augurs well for the markets going forward.

In March last year, we made a bold prediction that the Sensex could rise 70% over the next two to three years, taking it to 40,000. With certain fundamental indicators playing out, we expect more stock market participants to wake up to our idea going forward. We feel there are stocks well positioned to ride the earnings upside to Sensex 40000.

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