Is the post-Budget rally sustainable?

He said real estate sector should be especially happy since it has received specific sops

The Budget was well-received with the market recording broad-based gains on Budget day. The rally may have been partially based on the sentiment of relief. There were no major changes in the tax treatment and there was indeed some tax relief for corporate and individuals.

The perception is also that the Budget has several positives. There is an attempt to boost infrastructure spending and also to encourage private sector investment and consumption across the board. The abolition of the FIPB may cut down the red tape associated with foreign investment inflows.

The real estate sector should be especially happy since it has received specific sops. Banking will be mildly disappointed since the PSU banks require much more than the allocated Rs 10,000 crore in terms of allocation. Most investors shrugged off caveats about the possible negative impacts of protectionism abroad, a strong dollar and rising crude prices.  

In terms of returns, the market has rallied strongly since last March, rising from the 6,800-Nifty levels during the 2016 Budget session. There was a sharp correction during the demonetisation period but the rally resumed in late December. The Budget has given the uptrend some fresh impetus and momentum.

A look across sectors is interesting

The NSE has 12 major sectoral indices. The benchmark Nifty has returned an excellent 17.4 per cent since February 1, 2016 and this can be taken as a proxy for the market. Only two of the 12 sector indices have underperformed the Nifty in terms of returns. Both are high-weight industries with substantial representation in the Nifty. The IT sector has returned minus 11.4 per cent, while the pharma sector also has a negative return of minus 9 per cent. 

Every other industry has offered excellent and in certain cases, astonishingly high returns. The share prices of metals businesses for instance, have more or less doubled in the last year. There has been some revival of the global commodities market and there have been some protectionist measures taken to try and shield Indian metals manufacturers from cheap Chinese imports. 

A revival in the automobiles sector has led to roughly 35 per cent returns across the sector. Banks as a whole, have yielded 34 per cent returns but PSU banks (which have terrible balance sheets) have seen 53 per cent capital appreciation as investors have bet on a bailout. That has not yet materialised but hopes for a public sector banks’ bailout remain. Falling interest rates have led to high gains for non-banking financials. The energy sector has benefited from low crude prices. 

On Budget day, the Nifty rallied by two per cent. The same pattern prevailed across sectors. IT and pharma fell, while other sector indices outperformed the Nifty. Realty was the biggest gainer, bouncing almost five per cent while the PSU Bank index rose by four per cent. Hopes of higher consumption pushed the FMCG and automobiles indices up by over three per cent. The bullish pattern was sustained on February 02, 2017 though the gains were more muted. 

Is this uptrend sustainable? In technical terms, there is no reason why it may not be. Many of the indices are now within 5-10 per cent of their respective all-time highs and this would be classified as a full-scale bull market. In fundamental terms, valuations are very high, in comparison to both historical levels and compared to current earnings growth rates. Many investors are making optimistic forward projections. Those might not be realistic and the market could therefore, be ripe for big corrections on any negative developments.