Nifty crosses 8,000: Auto, pharma shine in 1,000-point journey

Indices might correct in the near term but in the long run the outlook is upbeat, given the expectations of reforms

Stocks of the automobile, pharmaceutical, information technology (IT), metal and realty sectors have been among the top gainers in the National Stock Exchange's benchmark Nifty index's 1,000-point journey to the 8,000 mark during the past 78 days. The CNX Auto and CNX Pharma index surged more than 25 per cent each. The CNX Realty, CNX Metal and CNX IT indices gained 18-25 per cent this 1,000-point rally.

The 50-share CNX Nifty crossed 8,000 points for the first time on Monday, after data issued after market hours on Friday had showed the economy expanded in the April-June quarter at its fastest pace in a little over two years, of 5.7 per cent. After an intra-day high of 8,035 on Monday, the Nifty closed at a fresh all-time high of 8,027.70. It has gained 14.4 per cent or 1,013 points from May 12, when it hit the 7,000-mark for the first time. And, has rallied 12.7 per cent or 905 points after the Lok Sabha election result on May 16 when the Narendra Modi-led Bharatiya Janata Party won a clear majority.

The rally has been backed by sustained foreign institutional investor flows and domestic mutual funds, which have bought Rs 42,660 crore ($7.15 billion) and Rs 13,843 crore, respectively, from May 12 till August 28. Better than expected corporate earnings for the quarter ended June also boosted sentiment.

"The stellar run continued on the back of better than expected GDP data and an increased conviction amongst the investing community on equities as an asset class for the next three to five years. It was encouraging to see markets hitting fresh all-time highs, led by cyclicals which have started taking the lead in taking the markets forward, in anticipation of a capex-driven recovery," says Devang Mehta, senior vice-president and head equity advisory and retail sales, Anand Rathi Financial Services.

While the journey till now has been built on hope of reforms after a stable and active government at the Centre, analysts suggest the road ahead will depend on growth in earnings and how quickly the new government can implement key policies.

"If the momentum sustains and we do see rollout of key reforms, the markets have the ability to trend up close to 19x-20x the FY15 (BSE Sensex) earnings by the time we get to the close of the current financial year. The Sensex can scale up to 30,000 by March 2015-end. The Nifty can move up to around 9,500. Banks and oil & gas are the two main sectors that have to support the next up-move of 1,500 points on the Nifty, beside adequate support of the other sectors," says Taher Badshah, senior vice-president and fund manager, Motilal Oswal AMC.

While most analysts agree the market should do well in the long term, they do caution against a possible near-term correction.

“Year-till-date (YTD), the Sensex is the best performing among major global markets. Post its strong performance, we think the markets would be range-bound in the near term and might correct around five per cent over the next two months (giving up half of its post-election result gains), as the pace of reforms is slower than the market initially built in," says Bank of America Merrill Lynch's managing director and head of research, Jyotivardhan Jaipuria, in an equity strategy report dated Monday. “However, we continue to be bullish in the long term on the Indian market and believe that buying on dips is a particularly compelling strategy.”