30 Dec 2017 14:46 IST

Market rally: 52 weeks on a high

Backed more by liquidity than by fundamentals; DIIs took over from FPIs after demonetisation

Just as the dotcom bubble of 2000 and the financial crisis of 2008 are the most recalled events in recent stock market history, 2017 will be remembered in the years to come for its record-breaking rally backed purely by liquidity and not on fundamentals.

The key share indices, the Sensex and the Nifty, rallied 28 per cent. By year’s end, the Sensex closed above the 34,000-mark and the Nifty above 10,500.

Note-ban effect

The country’s economy is yet to fully recover from the demonetisation shock of November 2016, but the note-ban proved a boon for the stock markets. A lion’s share of the ₹15 lakh crore deposited in banks by Indian residents during the demonetisation window went into buying stocks via domestic institutional investors (DIIs).

Data show that nearly ₹1.16 lakh crore (a little less than $20 billion) was pumped into stocks by DIIs, the highest ever, against less than ₹50,000 crore worth of buying by foreign portfolio investors (FPIs).

“The management of stock markets by DIIs is the chief reason that helped the government overcome a crisis of confidence post-demonetisation and shoddy implementation of GST,” said a Dalal Street investor. “FPIs have blackmailed successive governments to toe their line since 2000, given the clout enjoyed by their huge fund flows. That changed in 2017.”

The rally, backed by both domestic and global dollar liquidity, continues even though corporate earnings saw no appreciable pick-up and India’s GDP saw its lowest growth level in over four years.

Nifty earnings recorded single-digit growth for the entire year; ahead of every quarter, analysts raised their expectations, only to cut a sorry figure in the post-earnings season.

For the first time in over two decades, the Sensex and the Nifty did not see even a 4 per cent correction during the entire year, and market volatility reached its nadir.

Reliance Industries, whose share price has been influencing Indian market sentiments for two decades now, doubled in value.

Yet, nothing in its earnings could match the scale of its share price rise — except perhaps an anticipation of future gains from its telecom business.

“The Nifty has continued higher for 12 consecutive months, a record despite multiple headwinds. While record mutual fund inflows and a positive trend in the US markets aided the optimism, the elephant in the room is the risk to rising bond yields in 2018,” said Rohit Srivastava, fund manager, Sharekhan-BNP Paribas.

Srivastava believes that recent tax reforms provide the US market a cushion from the immediate impact of rising interest rates, and a rising rate environment is positive for US financial stocks as well. But that might not be the case for EMs, which are net borrowers in dollars or attract investment flows.

India’s bond yields are up by nearly 15 per cent this year and touched a high of 7.40 on Friday despite an upgrade in ratings by credit rating agency Moody’s.

“After a 12-month rally in Nifty, market participants are not prepared for downside risk and even a 100-point drop in Nifty is called a crash. Investors and traders need to be more prepared for a risk-off in equity prices in the first quarter of 2018. For India, where the REER is at the highest in years, the case for a weaker INR is very strong,” said Srivasatava.

“The Nifty, therefore, has run ahead of itself and continues to do so and the only respite will come from a clear and targeted fiscal stimulus to spur growth. Among other global macro trends the falling dollar index last year caused the yen, euro and pound to strengthen, pushing down European and Japanese stocks. That trend has recently paused. When and if it resumes, it puts direct pressure on European and Japanese equities,” Srivastava added.

North Korea, the US rate hike, the China debt worry, crude oil shock due to geopolitical tensions on the global front and lower GST collections and slowing growth on domestic side are a few concerns that could test the market rally until it cracks, experts said.

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