Sensex snaps 9-day winning streak as traders book profits

Caution reigns ahead of ECB meeting, but European rate cut could trigger a fresh bull run

Caution ahead of the European Central Bank’s (ECB) crucial rate-setting meeting and profit booking halted the Indian market’s record breaking run on Thursday. The Sensex had gained about 825 points, over three per cent, to record high levels in nine straight trading sessions between August 20 and September 3, amid easing global geopolitical tensions, drop in crude oil prices and uptick in domestic economic growth number.

The 30-share Sensex on Thursday declined 54 points, or 0.20 per cent to 27,085.93. While the broad-based NSE Nifty fell about 19 points, or 0.23 per cent to 8,095.95, retreating from previous day’s all-time high level of 8,114.6.

The decline, which was in-line with other global markets, was led by stocks in the metal, capital goods and banking sector.

Bulls, however, are once again expected to take control of the market following an expected interest rate cut by the ECB to boost economic growth and prevent deflation.

The ECB at its Governing Council meeting in Frankfurt reduced all three of its main interest rates by 10 basis points. The benchmark rate is now 0.05 per cent and the deposit rate is now minus 0.2 per cent. Only about a tenth of economist, surveyed by Bloomberg, expected a reduction in interest rates.

Most European markets turned positive, while US futures market advanced following the news rate cut news.

The rate cut by the ECB would increase the foreign investor flows into the Indian market, providing a further boost to share prices.  Net buying by foreign institutional investors (FIIs) in Indian stocks has already crossed the $13 billion mark.

According to provisional figures, FIIs bought shares worth Rs 1,698 on Thursday, while domestic institutional investors sold shares worth around Rs 555 crore.

Most investors are optimistic on the prospectus of the Indian market on hopes that the Prime Minister Narendra Modi would take steps to boost economic growth.

“An unprecedented majority mandate for a reformist government has gotten equity investors excited. The government though has inherited a poor economy with a large fiscal deficit and high inflation, taking out the scope for any short-term measures and quick fixes. We expect improvement in India’s economic indicators to be gradual. The wheels are already in motion with the government working hard to revive the investment cycle and keeping a lid on inflation. Meanwhile, the stock markets are trading at average valuations, with earnings expectations not pricing in an upgrade cycle yet,” said CLSA in a special report on the Indian market.

Following a near-30 per cent jump in the Indian markets so far in 2014, one-year forward price-to-earnings multiple for the Sensex stocks has surged to 17 times.

Most analysts are of the view that the Indian market will continue to trade above their long-term earnings multiple on improving macroeconomic landscape.

“The economic indicators such as inflation, GDP and current account deficit have shown improvement. The latest corporate earnings were also satisfactory. Sentiment among corporates and investors too has improved. The government is giving the right signals. Clearly, all the right levers are in place for the economy to do well,” said Motilal Oswal, chairman, Motilal Oswal Financial Services.

On Thursday, shares of blue-chip stocks like ICICI Bank, Reliance Industries and Tata Consultancy Services fell around 0.5 per cent each. The worst drop was seen in real estate firm DLF, which dropped 8.4 per cent, after the Punjab and Haryana High Court set aside the state government's decision to allot 350 acres of land in Gurgaon to the realty major in 2010.