Markets on cloud nine

Banking & auto shares lead 481 points rally in Sensex; analysts caution against euphoria

Indian markets on Wednesday posted their biggest single-day jump in over a month as a result of the India Meteorological Department (IMD)’s prediction of an “above normal” monsoon. The softening of retail inflation, too, improved the outlook for the economy and raised hopes of further rate cuts. A global rally in stocks and commodities sparked by surprisingly upbeat China trade data further boosted investor sentiment.

The S&P BSE Sensex gained 481.16 points, or 1.91 per cent, to end at 25,626.75, the highest close since January 4. The broad-based National Stock Exchange’s Nifty 50 added 141.5 points, or 1.84 per cent, to close at 7,850.45.

The IMD has predicted rainfall at 106 per cent of the Long Period Average (LPA). This has infused optimism after two consecutive droughts. Adequate monsoon could aid better agricultural productivity and provide a thrust to the domestic economy. Banking and automobile shares led Wednesday’s rally.

Trade data in China eased concerns over the health of the world’s second biggest economy and triggered a rally in commodity prices and sell-off in so-called safe haven bets such as gold and Japanese yen.

“The ongoing equity rally in India will continue in the medium term driven by the likelihood of normal monsoon rainfall, improvement in domestic indicators coupled with an accommodative RBI (Reserve Bank of India),” said Abhay Laijawala, head of research, Deutsche Equities India.

The Indian market has rallied 11.4 per cent since March 1 on the back of foreign investor flows of $4 billion (Rs 26,628 crore). On Wednesday, foreign institutional investors (FIIs) net bought shares worth around Rs 650 crore, provisional data showed. As a result of the rally, the index is down only 1.9 per cent in 2016 after declining 12.3 per cent earlier.

The Sensex is now trading at around 16 times its one-year forward earnings estimates. In comparison, the MSCI EM index trades at 12.2 times and the MSCI Asia ex-Japan trades at 12.3 times.

“The expectations of a medium-term cyclical rebound in China is likely to fuel risk appetite further, particularly aiding commodity and commodity equities,” said Laijawala.

Most Asian markets gained around two per cent, while European markets too gained around a per cent on Wednesday. Oil prices remained steady around $40 a barrel.

Among Sensex components, barring Infosys and Adani Ports, all others ended with gains. The major gainers were Mahindra & Mahindra (up 7.4 per cent), followed by ICICI Bank and Bajaj Auto, which rallied around five per cent.

Rural focused sectors such as automobiles and banking were the biggest gainers at 3.6 per cent and 2.6 per cent, respectively.

Some analysts, however, cautioned investors against the euphoria surrounding the monsoon as they thought it was too early to predict the monsoon's impact on agricultural productivity and the gross domestic product (GDP).

"It is too early to revise our prediction of GDP and agriculture production," said Madan Sabnavis, chief economist, Care Ratings.

"Above-normal rains could support food grain output and lift agricultural incomes, acting as a tailwind to GDP growth. Both the spatial (geographical areas) and temporal (over time) rainfall distribution are as important. We find that the correlation between annual food grain production and rainfall is highest for the month of July. Hence, the true impact of rainfall on agriculture output will be known by mid-July, when the sowing season will be in full swing. Meanwhile, we do not expect normal rains to alter the food price inflation trajectory significantly," points out Sonal Varma, executive director and India Economist at Nomura in a co-authored report with Neha Saraf.

U R Bhat, managing director, Dalton Capital Advisors. also believes that there is more jubilation in the markets than what is warranted, as the impact will can only be ascertained later in the year. "It is typical of the markets to overdo positive news. While the Nifty can hit 8,000 going ahead in the backdrop of this current sentiment and a few good early March quarter results of India Inc, I believe the markets will start correcting once the not-so-good results start flowing in, say by May-mid," he says.