The Sensex and the Nifty50 have once again narrowed the distance from their all-time highs. Here's what has powered the recovery on Dalal Street so far, and what is keeping it away from fresh peaks.
Dalal Street has once again come within negligible distance from the headline indices' lifetime highs, and the bulls are loving it. Though the Sensex and the Nifty may scale new records in the short term, driven by foreign fund inflows and growing retail participation, many experts feel it may be a while before the Indian market returns to the kind of liquidity-driven rally that ended after 18-odd months in October 2021.
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The Sensex hit a 52-week high on November 9 and came within 798.2 points or 1.3 percent of its record high of 62,245.4, touched on October 19, 2021. The broader Nifty benchmark came within 310 points (1.7 percent) of its all-time high.
However, it may not need any major global or domestic development for the Nifty50 to stage a 2-3 percent upmove, according to Deepak Jasani, Head of Retail Research, HDFC Securities.
"While a lot would depend on triggers including the outcome of midterm elections in the US, monetary policy, corporate earnings and FPI flows, we are too close to making a new high and may be able to do that quite soon... Besides, a signal of ceasing Russia-Ukraine hostilities and an indication from the Fed that it is close to ending the rate hike cycle may also help," he told CNBCTV18.com.
Here's a look at some of the key factors influencing the Street:
FIIs have remained net purchasers of Indian shares worth Rs 16,674 crore in the past eight trading days — their longest and heaviest buying spree in about three months. FIIs were the main driving force behind the nearly one-sided, 18-month-long rally on Dalal Street till October 2021.
In August, they emerged as net buyers for Indian shares in a month for the first time since September 2021 — and have been buying intermittently ever since.
If sustained FII inflow is what it will take for the Indian market to stage another relentless rally, the bulls may have to wait a bit for another surprise.
Market veteran Samir Arora exuded confidence in an interaction with CNBC-TV18 that foreign investors may return to Indian equities by January or February, saying, "a New Year always makes them reset their allocations".
Manufacturing activity in the country continues to recover, but elevated levels of production costs and higher interest rates continue to play spoilsport. Capacity utilisation in the industry — which includes everything from automobiles to steel, textiles to electronics — is at 70 percent, meaning nearly a third of the country’s production capacity is still idle, according to a survey by industry body FICCI.
Hopes of a comeback in domestic economic activity more than two years into the pandemic have driven bouts of pullbacks on Dalal Street over the past few months.
Overblown recession fears
Chetan Ahya of Morgan Stanley does not see a recession as a base-case scenario. "India is one of the countries in the region highest dependent on commodity prices... That is an offset... We are highlighting downside risks, but we are not very bearish on India's growth outlook," he told CNBC-TV18.
"In the current environment, India is one of the countries that can generate domestic demand... On a relative basis, we picked India as the No. 1 country in the region," he said.
Crude oil prices have cooled off about one-third from a 14-year peak hit in March 2022. Relatively lower crude prices are a positive for India, which relies heavily on imports to meet nearly four-fifths of its oil requirement.
Fears of a mild recession in the US — the world's largest oil consumer — have hurt fuel demand and, in turn, brought down oil prices.
Morgan Stanley believes that crude oil will need to stay below $100 a barrel to create meaningful room for monetary easing — meaning a reversal from the current cycle of rising rates.
The rupee has recovered about 2 percent from its record lows hit last month, in some respite for import-heavy spaces such as petroleum, electronics and textiles.
A series of 20-year peaks in the American currency against six other peers put pressure on the rupee earlier this year, sending it off to levels below 83 for the first time.
However, weakness in the rupee is positive for spaces such as IT, which draw the lion's share of their earnings from foreign markets. Many analysts see some more pain for IT companies — one of the worst hit pockets on Dalal Street so far in 2022 — before they overcome margin pressure caused by elevated employee costs despite higher tech spending across sectors.
The corporate earnings season has had a largely positive influence on the market with a few major misses. A slew of heavyweights has beaten Street forecasts in July-September, aiding market sentiment.
"Sentiment and momentum favour continuation of the rally in the near term. Apart from sustained FII buying, good July-September results, particularly in banking, capital goods and auto companies, have turned out to be tailwinds for the market," VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, told CNBCTV18.com.
Any set of positive macroeconomic data from major economies, including India, supports optimism that central banks will slow down with the degree and/or frequency of rate increases in their battle against red-hot inflation.
Central banks — including the Fed and the RBI — have a Herculean task at hand: to control uncomfortably high inflation levels without disrupting economic growth.
Many experts say valuations have once again turned more attractive relatively on Dalal Street, having cooled down from red-hot levels of the last rally. However, some see room for more correction before they turn attractive.
The Nifty50 price-to-earnings multiple has returned to a 12-month forward multiple of 19.6 times, which is in line with its long-term average, according to Gautam Duggad, Head of Research-Institutional Equities at Motilal Oswal Financial.
"In the context of MSCI Emerging Markets, the premium now is a staggering 155 percent, which is at an all-time high, because the rest of the markets have done pretty much nothing," he told CNBC-TV18.
First Published: IST