Sensex kisses 24,000, rally raises eyebrows
May 13 2014 , Mumbai
Exuberance creates risk of setback: Analysts
But some analysts raised the red flag, saying at 18.4 times trailing 12-month earnings, the market might have gone up too much too fast, creating room for a big disappointment if NDA fails to get a perfect score.
Boosted by post-poll surveys, investors added to their equity bets on Tuesday, helping Sensex to touch a new lifetime high of 24,068.94, but it closed lower at 23,871.23, a gain of 320.23 points or 1.36 per cent. With Tuesday’s gain, Sensex has risen 1,547 points in three sessions since Friday. Nifty touched 7,172.35 in intra-day trade, before closing at 7,108.75, up 94.50 points (1.35 per cent).
Analysts said the exit polls buoyed investors to take positions ahead of the actual results on Friday, but may have raised the risk of a big disappointment if the NDA fails to get a clear majority in the final count.
“While the national totals (in exit polls) are within a relatively narrow range, the state numbers that add up to those totals vary widely. This suggests high measurement error margins,” brokerage Credit Suisse said in a report.
But the market’s fear gauge, India VIX, which was hovering at multi-year high last week, retreated 13.63 percentage points on Tuesday, reflecting investors’ confidence on the exit polls. Analysts said the reduced chances of a fractured election verdict soothed investor nerves.
Credit Suisse analysts Neelkanth Mishra and Ravi Shankar said a larger tally for the BJP in the elections implies that the party would get to retain most of the economically relevant ministries.
“Our investor survey had suggested expectations of nearly 240 seats (for the NDA). While the rally since then suggests a higher number is priced in, exit poll results seem to be still higher,” the brokerage said.
FIIs bought stocks worth a net of Rs 2,026.23 crore on Tuesday, indicating their bullish sentiment. Domestic institutions, however, turned net sellers of stocks worth Rs 649.42 crore.
“We believe even the lower end number of 249 (in exit polls) is in line with market expectations. The exit polls indicate that the NDA will be able to form the next government without much trouble and that will leave enough flexibility with Modi to pursue his growth policies,” brokerage CLSA said in a note.
The PSU stocks were in the limelight on Tuesday, with the BSE PSU index (up 2.45 per cent) and CNX PSE index (up 2.97 per cent) ending the day as top performers among all the indices. Analysts said reform hopes under a new stable government boosted this basket of stocks.
BHEL, which gained 10.25 per cent to Rs 218.80 apiece, was the top performer in the 30-stock Sensex pack. ONGC gained 3.81 per cent, L&T 1.6 per cent and mortgage lender HDFC 1.2 per cent.
Other top performers outside the PSU pack included HeroMotoCorp (up 5.39 per cent to Rs 2428.85), Tata Power (up 3.62 per cent to Rs 84.55) and Wipro (up 3.36 per cent to Rs 528.80). Heavyweight Reliance Industries gained 3.15 per cent to close at Rs 1,061.35.
“If the exit polls are accurate, the NDA should be able to build a stable coalition, boosting expectations of a stable government for the full five-year term. We believe the NDA will pursue economic reforms in line with Modi’s campaign theme of economic growth and development, and as detailed in the BJP manifesto. But its margin of victory is likely to influence the nature of the reforms and the pace of their implementation,” Barclays analysts led by Siddhartha Sanyal wrote in a note.
Brokerage CLSA said a potential strong government would be a positive for investment plays such as ICICI Bank, Axis Bank, SBI, L&T, Ultratech and Maruti. NSE’s banking index ended 0.6 per cent higher after earlier hitting a record high at 14,367.75. State Bank of India, India’s biggest lender, gained 1.5 per cent, while Bank of Baroda rose 4.5 per cent. Among other domestic-oriented stocks, Ambuja Cements surged 4.8 per cent and Tata Power 3.7 per cent.
“The next government will have the difficult task of managing inflation, fiscal deficit and a weak monsoon, which might keep the market in a consolidation phase in the short term immediately after the election results,” CLSA analysts led by Mahesh Nandurkar said.
“FIIs have been strong buyers in Indian equities with the annualised net buying close to that in 2013. Largecaps have outperformed smallcap and midcap stocks over the past few days,” UBS said.
On Tuesday, BSE smallcap and BSE madcap indices outperformed the Sensex with gains of 1.71 per cent and 1.44 per cent, respectively.
Beyond near-term moves, the fundamentals will return as the dominant factor, UBS said. “Our base case remains that given changed political economy, any government which comes in will continue course correction and aid economic recovery. We remain constructive on the market, driven by a cyclical economic recovery, albeit mild, given the realities of fiscal consolidation and inflation moderation,” UBS analysts said in a note.