Sensex, Nifty near bull territory

Up 19% from February lows but analysts say further rise could be limited, as stock prices are stretched

The benchmark BSE Sensex is approaching bull market territory, having rallied nearly 19 per cent from the 2016 low of 23,000 on February 29. The National Stock Exchange's Nifty50 has gained 19.8 per cent from its 2016 low of 6,987, touched on the same day as the Sensex.

A bull market is when the value of a market rises 20 per cent or more over at least two months. During a bull phase, overall investor confidence in the market is high; also, there are more stocks gaining overall than declining.  

Both the Sensex and the Nifty on Monday ended at new 10-month highs of 27,278.76 and 8,370.7, respectively. Both indices look set to cross the 20 per cent threshold, given the optimism among both global and domestic investors.

“I firmly believe we are set for a bull market. The single biggest concern for the market was the monsoon, after two droughts. However, the rainfall deficit has come down, global deflationary fears have receded and corporate earnings have improved. All this augurs well for the market,” said G Chokkalingam, founder, Equinomics Research. “By end of this calendar year, I expect the Sensex and the Nifty to touch new lifetime highs.” Both indices are still seven per cent below their record highs, touched in early 2015.

However, not all analysts are painting a rosy picture. Suhas Harinarayanan, head-research, JM Financial Institutional, says market valuations “are no longer in the value zone”. "Given that the markets are now pricing in a higher probability of double-digit earnings growth, there looks to be only a few domestic factors (GST tax, primarily) that could drive markets higher in the near term. Hence, we expect global events to be a bigger driver for broader markets,” he said in a note on Monday.

Although several domestic factors have shown early signs of improvement, the market rally since March has been largely due to global factors, particularly supportive action from global central banks. Experts,  therefore, believe the strength of the bull market will depend more on what happens globally.

Valuations-wise, however, the Indian market offers little room for much further upside, say some. Sanjeev Prasad, senior executive director and co-head, Kotak Institutional Equities, believes Indian market valuations have gone to “uncomfortable levels”.

“The rapid appreciation in prices of several stocks in the past week has further reduced the appeal of the Indian market. It is increasingly difficult to find ideas with decent absolute upside without looking at FY19,” he said.

Kotak Institutional Equities says the Nifty currently trades at 18.5 times its estimated earnings for the ongoing financial year and 15.3 times that for the next one. The valuation multiples are above the historic average for the Indian market.

Prasad of Kotak is recommending pruning of stocks in the rural and non-banking financial company spaces, as these have already rallied sharply. Instead, preferring traditional large-cap and defensive stocks, such as State Bank of India, HDFC and Tata Motors.

Harinarayanan of JM Financial is advising a ‘bottom-up’ approach and a portfolio skewed towards private financials, health care and two-wheelers.