Sensex gives 36000-point cheer as PM Modi rocks Davos

As Prime Minister Narendra Modi takes Davos by storm, at home it is the turn of S&P BSE Sensex and the NSE Nifty 50. The benchmark zoomed on Tuesday past 36000 just four trading sessions after topping 35000. The NSE Nifty 50 too has surpassed the long-awaited 11000 level, as bullish investors up their bets ahead of the 2018 Budget and bears struggle in a vortex of short-squeeze. While most Dalal Street experts see the domestic stock markets continuing the northward bound journey, a few alarm bells have begun ringing as the pace of records tumbling seems too fast and too furious.       

Driven by sustained overseas inflows after positive earnings and expectations linked to government containing fiscal deficit, the markets have seen a dream run just days before the all-important Budget on February 1. Noted investor Porinju Veliyath, founder & CEO, Equity Intelligence India said it's not surprising to see Sensex crossing 36000 now or 40000 after a few months. "This is in line with the economic events happening in our Nation. India is entering the next growth orbit driven by the unprecedented reforms and actions by the government for the long-term economic progress. The big picture about India is that our economy is about to grow to $5-6 trillion from the current $2.35 trillion, which will result in massive wealth creation by smart entrepreneurs and investors," he told DNA Money.

While the ongoing October-December 2017 corporate earnings and expectations from the Union Budget 2018 took centre stage for domestic investors, Karthikraj Lakshmanan, senior fund manager – equities, BNP Paribas Mutual Fund said foreign sentiment was buoyed after US legislators struck a deal to end the government shutdown and as the International Monetary Fund revised its forecast for world economic growth by 0.2 percentage points to 3.9% for both 2018 and 2019.

The sheer speed with which Indian markets have run up means that trading range targets, given just a few days ago, need to be revisited yet again. Prabhudas Lilladher Pvt Ltd had maintained trading range for the market to be between 9500-1050 for Nifty, and just a few days ago, in fact, revised the range from 9500-10500 to be between 10000 and 11000 for the next three months.

No major earnings disappointments reported so far and we seem set for an earnings recovery after 5 consecutive flat years. "With crude surging, OMCs are underperforming and fiscal deficit projections in the upcoming Union Budget will be keenly watched. We believe markets will look to consolidate gains after the Budget, and hence actual earnings performance from companies becomes crucial for this rally to sustain over the medium term," said B Gopkumar, ED & CEO, Reliance Securities.

Sameet Chavan, chief analyst-technical and derivatives, Angel Broking said it appears as if the traders' fraternity has kept a lot of expectations from this upcoming Budget and hence, probably the anticipation is adding fuel to this 'No Negative is as good as positive' kind of scenario. "We must accept that such 'Too Fast Too Furious' moves generally do not offer time to think even for those who are willing to ride the tide...If the momentum persists then the rally may continue and now, 10994 would be seen as an important support level," said Chavan.

Some brokerage houses feel that overestimation error in expected earnings continues. ICICI Securities expects earnings growth to be estimated 19% for fiscal 2019 as against the consensus estimate of 25%, which will result in moderation of expectations during the year. "In the current bull run, we have not yet entered the phase where the actual earnings outpace estimated earnings resulting in positive surprise on earnings, which was observed during the FY05-FY07 phase. In this context, we believe it is unlikely that growth will surprise on the upside in CY18 and, against the backdrop of stretched valuations and evolving risks, equity returns could be moderate. Rolling forward to March 20 EPS, our revised 1-year forward target for the Nifty 50 index stands at 11,750," said ICICI Securities.

Key risks to Indian equities in 2018 include a sustained rise in oil prices as India relies on imports for 85% of its domestic oil demand thereby adversely impacting inflation, current account and government finances, a continuation of the earnings downgrade cycle, and volatility in foreign portfolio flows due to global monetary tightening. At least two fund managers, speaking off-record, see a deficient monsoon in an 'election-heavy' year; and lack of fiscal maneuverability for the government as fiscal deficit seems set to breach the FY18 target on lower revenue collection.

Not everybody is gung-ho. Bank of America Merrill Lynch said that it stays "cautious" on Indian equities, with a December 2018 Sensex target of 32,000. "We see little possibility that Budget 2018 delivers reasons for material upside to an already inflated equity market in India," Bank of America Merrill Lynch India equity strategist Sanjay Mookim said.

Mookim is not alone. Sharing the annual outook, Gautam Chhaochharia, head of India research, UBS Securities India Pvt. Ltd, said that end-2018 Nifty target of 10500 is based on 18x one-year forward PE and 9%/13%/15% Nifty earnings growth in FY18E/FY19E/FY20E. "This implies no returns from the index in 2018. Our upside/downside scenario assumptions of 11,900/8,800 for the Nifty suggest a bigger skew to the downside, implying unattractive risk-reward, though more balanced than our expectations in past years," UBS said.

• This is in line with the economic events happening in our Nation. India is entering the next growth orbit driven by the unprecedented reforms and actions by the government for the long-term economic progress. The big picture about India is that our economy is about to grow to $5-6 trillion from the current $2.35 trillion, which will result in massive wealth creation by smart entrepreneurs and investors – Porinju Veliyath, founder & CEO, Equity Intelligence India
   
• Our upside/downside scenario assumptions of 11,900/8,800 for the Nifty suggest a bigger skew to the downside, implying unattractive risk-reward, though more balanced than our expectations in past years – Gautam Chhaochharia, head of India research, UBS Securities India