It was another bull run on Thursday, as strong buying in bank stocks drove equity markets to a fresh high. The BSE Sensex jumped more than 425 points intra-day to a new peak of 35,507.36, before some profit-booking set in and the benchmark index finally closed at 35,260.29, up 178 points or 0.5 per cent. The NSE Nifty 50 also jumped to a new high of 10,887.50, before closing at 10,817.00, up 28 points or 0.3 per cent.
Analysts are now calling for caution in the near-term and say investors must be extremely focused on individual stocks and not the broader markets.
Over the past one year, barring a few minor correction, the markets have been largely surging ahead. The Sensex closed above 34,000 levels on December 26; it has topped 35,000 in just 16 trading sessions.
There have been two major drivers for the markets in the past two days. While on Wednesday investors heaved a sigh of relief after the government cut its additional borrowing target from Rs 50,000 crore to Rs 20,000 crore, on Thursday, reports that the government was mulling increasing foreign investment in banks, boosted sentiments in that sector.
Furthermore, markets overseas have also been strong, which is also aiding market mood.
The government had earlier planned to additionally borrow Rs 50,000 crore for the year-ending March 2018, which had raised concerns, whether the government would be able to maintain its fiscal deficit target of 3.2 per cent of GDP. So, the decision to cut the additional borrowing was welcomed by the street.
A media report on Thursday suggested the union government was in discussions to raise foreign investment limits in private-sector lenders to 100 per cent from 74 per cent.
This drove banking stocks higher; HDFC Bank rose 2.2 per cent, Kotak Mahindra Bank, IndusInd Bank were up over 1 per cent and ICICI Bank also gained about 1 per cent.
While analysts still opine that in the medium-to-long term, Indian markets will deliver good returns, one must be cautious following the rally over the last few days.
“It is fair to be cautious in the near-term, especially over the next few weeks. For the full year, you can still expect moderate returns but one would have to be very stock specific while investing,” Vinod Nair, head of research at Geojit Financial Services, told THE WEEK.
The strong run-up in the markets over the last twelve-months, reflects investors' “robust” faith in corporate earnings recovery over the next two years, said Dhiraj Relli, MD and CEO of HDFC Securities.
More companies surprised on the upside in the second quarter earnings, and analysts are expecting the pickup to continue in the third quarter as well, which will also be on a low-base, because the earnings in the October-December quarter of 2016 were impacted by demonetisation.
HDFC Securities expects Nifty 50 index companies to report a 15-20 per cent growth over the next two years, versus a compounded annual growth of just 4 per cent over the last five years.
But, it too has a word of caution at current levels.
“When markets are hovering at all-time high levels, investors should chase quality, which can be in large-caps as well as mid-caps, rather than just looking at the market cap. Right now, we won't advise customers to go with high risk stocks, but go with established companies, which will make more sense. They may miss out on some upside, but the downside is protected,” said Relli.
The brokerage is expecting returns in the high-teens from equity markets this year.
