Benchmarks see fourth straight weekly gain

Sensex and Nifty close at new highs, analysts expect positive sentiment to continue

The benchmark indices on both major stock exchanges had their fourth straight weekly gain on Friday, both closing at record highs. On the BSE, the Sensex gained 135.7 points or 0.4 per cent to close at 31,273. On the National Stock Exchange, the Nifty closed at 9,653, up 37.4 points or 0.4 per cent.

The broader markets reflected a similar trend, with the BSE mid-cap and small-cap indices going up by 0.7 per cent and 0.5 per cent, respectively. The Sensex gained nearly one per cent during the week and has advanced nearly five per cent in the past month.

The rally was led by Hero MotoCorp's stock, up three per cent on the back of strong sales numbers in May. Shares of Cipla and Adani Ports went up by 2.6 and 2.1 per cent, respectively.

Market participants say there is strong positive sentiment among investors, due to strong macroeconomic indicators and stability. There is also ample liquidity, with stable inflow from both domestic and foreign institutions. According to Vinod Nair, head of research, Geojit Financial Services, there is a strong buying interest in index heavyweights and hope of a good monsoon are further helping the markets.“The positive momentum is continuing with expectation that the Reserve Bank is likely to be less hawkish in the monetary policy meeting next week. Declining crude oil prices, along with positive global cues, are also helping Indian markets to scale new heights,” he said.

Analysts expect a recovery in corporate earnings to be the key headwind in the medium to long term. Although the markets have scaled new heights in the past two years, growth in earnings per share (EPS) has been flattish.

“We believe the broader market valuations have limited re-rating triggers in the near term, unless accompanied by earnings recovery. An earnings up-cycle is ahead and this would be critical for further market returns. 

However, we expect earnings to revive over FY17-19,” says brokerage Motilal Oswal Securities, in a note to investors. The report added that earnings growth could be driven by recovery in cyclical sectors like metals.

Institutional buying is expected to continue, as domestic mutual funds still get impressive flow. As for foreign funds, India is expected to receive good inflow, owing to the positive risk appetite of investors. Mutual funds have purchased shares worth Rs 11,224 crore from the Indian markets in the year so far.Foreign institutions bought shares worth Rs 51,200 crore ($8 billion) in the first five months.

Although blue-chip stocks continue to see strong demand, the broader markets seem to have been trading flat in the past month. Analysts say the broader markets could be entering a phase of correction, since the valuations of these stocks had surged in the recent past, without a meaningful recovery in earnings.

“Investors have to be really careful while choosing stocks at this point of time. Some of the mid-cap and small-cap stocks have turned very expensive. Hence, the best way to participate in the markets currently is through the mutual fund route,” says Arindam Chanda, head of broking, IIFL Securities.