Expectations, global liquidity pushing Indian markets

The expectations of additional fiscal stimulus from the Centre, along with the increase in the global liquidity, has led to a short-term rally in Indian stock markets – which is likely to correct in the wake of weak macros.

In the past 29 trading sessions, since Finance Minister Nirmala Sitharaman announced cut in the corporate tax rates, the Sensex has surged by 4,154.77 points (11.5%), on hopes of further sops being offered by the government.

The rally has ensured that the benchmark Index of BSE reclaimed peak levels. However, one data point that suggests the gains have been skewed is the investor wealth creation. While the benchmark indices are claiming new highs every-day, the investor wealth creation, which had surged by 10.97% (Rs 15.2 lakh crore) since the announcement, has still been short of its peak level seen on June 1. Experts say that this is an indication of the fact that the gains have been polarised towards blue-chip companies.

“Sensex is rising on the back of strong global equity market performance and global liquidity,” said Akash Singhania, Fund Manager, Motilal Oswal AMC.

The rally in the markets has also been fuelled because of the expectations of a cut in the dividend distribution tax and other market related direct taxes.

“The Street has now started expecting some tax relief in DDT, LTCG, and STT which mainly led to the rally in Sensex. To add to it, corporate numbers have largely performed better on a lower base, corporate tax cut gains which have boosted the bottomline of companies,” said Umesh Mehta, Head of Research at Samco Securities.

Many believe that the markets are surging on hopes of a revival in earnings next year, as market makers buy on expected one-year forward data. “Managers and market participants buy on expected one-year forward data. With the government initiatives expected to take effect in that time horizon, market participants may be pricing in at this time,” said Anubhav Shrivastava, Partner, Infinity Alternatives.

This has created a lot of optimism in the investing community despite weak macros, which experts think is not sustainable. “Since the macros are weak there is a likelihood that the next leg will witness some correction in the near term as the ground reality of a slowdown cannot change overnight even though stock prices can move quickly on speculation. Markets will mature soon and experience a reversal,” Mehta said.

Srivastava believes that sustainability will be reflected in lower rolling of Volatility Index values over a few quarters. India Vix -- a volatility index based on the NIFTY Index Option prices – has seen a high deviation in the past year, with a 52-week high of 30.18 points and a 52-week low of 9.16 points.

"We believe that the upside in the benchmark indices – Nifty and Sensex – could be limited in the near term," said Gaurav Dua, Senior VP, Head – Capital Market Strategy & Investments, Sharekhan by BNP Paribas.