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Sensex, Nifty tumble on election results, US worries but rally seen soon

LiveMint logoLiveMint 02-03-2017 nasrin sultana

Mumbai: Indian equities tumbled after rising close to a two-year high on Thursday on investor anxiety about US rate hikes and the outcome of state assembly elections, but analysts are betting on an extended rally once the concerns ease.

The National Stock Exchange’s Nifty rose to 8,992.5 points, just 127 points shy of its all-time high, before closing at 8,899.75, down 46.05 points, or 0.51%, from the previous close. The BSE Sensex failed to remain above the psychological mark of 29,000 it breached in the morning, taking the cue from US stocks which rose to new records overnight. It closed the day down 0.5% at 28,839.79.

“Profit booking in late afternoon trade dragged indices lower,” said Karthikraj Lakshmanan, senior fund manager (equities) at BNP Paribas Asset Management. “Global markets traded higher after US stocks set new records overnight on growing optimism about global growth and rising bets of a rate hike in the US this month.”

Hopes of higher economic growth have been driving investor optimism in India, where investors are also closely following elections to five state assemblies whose outcome will be known on 11 March. Asia’s third largest economy grew at a healthy pace of 7% in the December quarter, ahead of China’s 6.8% growth. Indicators such as robust vehicle sales in February and an expansion in purchasing managers’s indices are also likely to give a leg-up to the rally in the coming days.

A global markets rally also supported early buying on Thursday. Overnight, US markets soared to an all-time high, with the Dow Jones Industrial Average closing above 21,000 for the first time, buoyed by President Donald Trump’s surprisingly temperate speech to Congress on Tuesday.

So far this year, the Sensex and Nifty have gained around 8.5%—comparable to the return delivered by MSCI Emerging Markets index.

Many market analysts are optimistic that the rally will sustain. Morgan Stanley, for instance, has increased its December target for the Sensex by 10% to 33,000.

There is “strong demand for stocks and a potential valuation overshoot, particularly if we add domestic demand from households”, Morgan Stanley wrote in a note to clients on Wednesday. “Net demand for Indian equities is rising rapidly. Domestic investors are already significant buyers of Indian equities and corporate buying is adding to this demand. Consolidation should lead to better margins and, eventually, better earnings growth.” The brokerage has also upgraded its fiscal 2019 earnings growth expectation for the Sensex to 24% from 15%, a view not shared by everyone.

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To be sure, the rally hereon is unlikely to be smooth.

The India Volatility Index (VIX), a measure of expectations of volatility, hovers around 13.3, after falling 29.63% over the past year. While a lower VIX level indicates investor confidence, a fall below 13 could mean that markets are getting complacent about risks.

Even in the near- to -medium term, there are events whose outcomes will be keenly watched, such as the results of the assembly elections and the meeting of the US Federal Reserve’s open market committee.

Hawkish comments by two Federal Reserve officials increased expectations of interest rates hikes. According to Bloomberg data, the probability of the US Fed raising rates in its March meeting has increased to 86% from 40% at the end of last week. That could lead to a stronger dollar and threaten foreign portfolio investor inflows which have totalled $1.8 billion so far this year.

Analysts said a US interest rate hike is already factored in by the market. Anand James, chief market strategist, Geojit BNP Paribas Financial Services, added that the market has already factored in 2-3 hikes in this year. In December, the Federal Reserve said that it would raise interest rates three times in 2017.

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