Nifty soars to record high on Modi wave: Is it a good time to sell stocks?

Since the beginning of CY17, the markets have gained nearly 12% in a liquidity driven rally.

With the markets - as represented by the Nifty50 index - scaling to fresh all-time highs, is it a good time for investors to sell? The latest push to the indices has been fuelled by the outcome of the state elections, especially Uttar Pradesh (UP), that was being dubbed as the semi-final to the 2019 general elections.

Since the beginning of calendar year 2017 (CY17), the markets have gained nearly 12% in a liquidity driven rally. While mutual funds have pumped in around Rs 6,504 crore since then as per Sebi data, foreign institutional investors (FIIs) have invested Rs 19,023 crore during this period, NSDL data show.

Though most analysts remain positive on the road ahead for equity markets from a 6 - 12 month perspective, they expect the markets to remain choppy in the near-to-medium term on account of uncertainty regarding the US Federal Reserve's stance on interest rates, policy action by the US president and its impact on the world economy and markets, implementation of the goods and services tax (GST) bill back home. For the markets to sustain at higher levels, a pick-up in corporate earnings is essential, they caution.

"Growth momentum in the economy still remains subdued. The GDP (gross domestic product) growth remains low; corporate earnings still are subdued; banking credit growth remains at two-decade low; fuel demand, which is a proxy for economic activity, fell 2.8% y-o-y in February. In this backdrop, we advise a cautious approach to the markets. One can use such opportunities to rebalance the portfolio. Having said that, one should keep investing without losing valuation comfort and also book profits in stocks where valuations are stretched," advises G. Chokkalingam, founder & managing director of Equinomics Research & Advisory.

Over the next few months, analysts expect the markets to remain range-bound as they fully understand the impact of GST implementation on the economy, and in turn, corporate earnings.

"We expect the market's focus to shift to earnings as India's election cycle will see a break until January 2018; global and domestic interest rate cycles are no longer supportive with likely increase in developed market's bond yields and moderate decline (at best) in domestic bond yields; and valuations of the Indian market are quite high and would require the support of strong earnings growth. Any disappointment on earnings will make valuations look even more expensive, which the market may not like," said Sanjeev Prasad of Kotak Institutional Equities in a recent report.

Near-term valuations, too, are not cheap both in a relative and historical context. India is trading at a 17.5x one-year forward PE multiple, a 15 per cent premium to historic averages. Within Emerging Markets (EMs), India trades at a near 40 per cent premium though this is nearly in line with historic averages, analysts say.

"Our view remains that while the first half of FY18 will see pressure on earnings, we will see a gradual recovery in the second half. Given the sharp rally in markets this calendar year, we think the markets are going to consolidate over next few months as the GST implementation plays out," points out Jyotivardhan Jaipuria, founder and managing director, Veda Investment Managers.

Notwithstanding the election results, analysts at Religare Institutional Research, too, believe that the risk-reward is not favourable currently and advice investors to sell into this rally. They expect Nifty EPS to rise by around 15 - 16% in FY18, and see no triggers for an earnings upgrade at this juncture.

"Importantly, rising domestic and U.S. yields cap valuation upsides on a fundamental basis - implying that further upsides are only likely to come from positive earnings surprises. In such a scenario, domestic liquidity would continue to remain the sole driver of the market. We reiterate our December 2017 Nifty50 base- case target of 8650, with a probability of our bull-case target of 9,800 materialising if liquidity remains strong as seen in recent past," suggests Varun Lohchab of Religare Institutional Research in a co-authored report with Rahul Agrawal.