News Hour- Nifty gains make India the best performer in 2012

MUMBAI: Foreign portfolio managers and local punters are betting on a rate cut, easy money, UP elections, cut in subsidy and a gradual shift in global liquidity from commodities to equities to buy stocks. Even though corporate profit growth is at its lowest and industrial output grew just 1.8% in December 2011 against 8.1% a year ago, Nifty has emerged as the best-performing index in the world since Januray 1.

Nifty has gained 940 points, or 20.33%, while Sensex rose more than 18% in the first 35 trading sessions of the current year to close at 5564 and 18289 on Friday. The bellwether indices were down 25% in 2011.
Are we getting into a situation where excess liquidity is being created amid positive cues in the eurozone, or is it because short sellers are rushing to cover large positions?

"It is a combination of factors such as strong liquidity, improved macroeconomic fundamentals and return of risk capital which has been driving the current stock market rally. The reasons why these factors are now turning out to be more realistic are declining inflation numbers, peaking interest rate, positive expectations about the budget and elections on the domestic front," says Devesh Kumar, managing director & head of equities, RBS Global Banking and Markets.

Fund managers are latching on to news clips and sound bytes - like the FM's statement that he was losing sleep over the rising subsidy bill - to ride the momentum. A robust FII inflow of $4.9 billion in the past 45 days - the highest ever figure recorded for that period - is driving the rally. Data suggest that this is the fastest ever rally in Indian equities.

In 2010, FIIs had pumped in over $29 billion in Indian stocks, resulting in a 3044-point rally in the Sensex. This year the Sensex has gained over 2800 points so far. But while FIIs invested $4.4 billion, domestic mutual funds and other institutional investors have been net sellers for Rs 3,000 crore and Rs 11,000 crore, respectively.

A loose monetary policy of ECB and Fed has created surplus liquidity which is boiling over into emerging markets. Also, the muted growth in global commodity markets prompted fund managers to shift their focus from commodities to equities, which were beaten down badly last year. The US gold price declined 4% in the past six months while the DJ-UBS Commodity index plunged over 5% during the same period.

According to Gaurav Dua, head of research at Sharekhan, "During the beginning of the year most Indian stocks were undervalued and traded below the average P/E multiple. The risk-on trade (shifting part of low risk asset to high risk is back on in full force through the first one-and--half month of the New Year. Moving forward, the market will consolidate at the current level, as most of the stocks are near to their average P/E multiples."

The rally has been led by banking stocks and interest rate-sensitive sectors like real estate and construction. Banking stocks rose in anticipation of treasury gains from higher bond prices that follow softening interest rates. ICICI Bank has been the top performer among the 30 stocks in Sensex, contributing 15% to the rise of the index. SBI and HDFC Bank, the two other large banks, contributed 9% each in the 2800-point rally.

Also perking up the mood were initial media reports about the outcome of Uttar Pradesh elections, suggesting the possibility of the Congress and Samajwadi Party jointly forming the government - a possibility that could lend some stability in the Centre. Such an outcome, it is felt, will put the government in a much stronger position to push through pending reforms and bills. "It's very difficult to pinpoint what's driving the current rally. But, the overall sentiment in the Indian stock market is improving after RBI cut the cash reserve ratio of banks, rupee appreciation and increasing fund flow from NRIs," said Gopal Agarwal, CIO, Mirae Asset Management. But sustaining the rally may not be easy, he felt. Sectors like infotech, pharma, FMCG and telecom have been laggards in the current rally. 

"The eurozone problems may be on the wane. Some of the US data are positive. Nobody wanted to catch the falling knife. The cash they were sitting on is now being deployed in the market," said Devesh Kumar.
(Source- http://economictimes.indiatimes.com)