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Equity markets at record highs, thanks to a few stocks

Strong earnings growth, steady inflow of funds driving markets higher

Representational Image | AFP

India's benchmark BSE Sensex has hit another record closing high, as strong buying continues in select stocks that are reporting strong earnings growth. Continued inflows into domestic mutual funds have also helped drive quality stocks higher. 

On Tuesday, the BSE Sensex hit a new high of 36,902.06, before closing at 36,825.10, up 107 points or 0.30 per cent. The NSE Nifty50 ended 50 points or 0.50 per cent higher at 11,134.30 points.

Among the major drivers fuelling the rally, engineering and construction giant Larsen & Toubro surged 3.4 per cent as investors cheered strong earnings growth at its subsidiaries. L&T Infotech shares rose 4.4 per cent, L&T Technology services jumped 11 per cent and L&T Finance Holdings gained 5 per cent.

Elsewhere, Asian Paints, Vedanta, Adani Ports, Tata Steel, Infosys and Coal India, all rose between 1.50 to 2.50 per cent. Select auto stocks like Mahindra & Mahindra and Maruti Suzuki also continued to trade higher.

So far in 2018, the BSE Sensex is up over 8 per cent. However, the mid cap and small cap indexes are still sharply lower than they were at the beginning of the year, suggesting the enthusiasm across broader markets still remains muted. The mid cap index is down 12 per cent since 2017-end and the small cap index has tumbled close to 16 per cent. 

Domestic equity mutual funds have seen inflows of over Rs 61,000 crore between January-June 2018. Foreign institutional investors have pulled out Rs 6,788 crore from India's equity markets this year, but the sharp selling seems to have come down. For instance, so far in July, there have been FII outflows of only Rs 357 crore, versus almost Rs 15,000 crore they pulled out over May and June. 

“The flows through SIPs (systematic investment plans of mutual funds) are still very strong and from a FII perspective, our macro dynamics better than emerging market counterparts, the kind of exaggerated selling we have seen, maybe some amount of rebalancing is happening,” said Mayuresh Joshi, fund manager at Angel Broking. 

While several headwinds—high crude oil prices, inflation, rupee depreciation and US Federal Reserve raising interest rates—remain strong, a few other economic parameters are showing signs of the economy picking up pace.

For instance, the manufacturing PMI (purchasing managers index), services activity, are at multi-month highs, credit to the retail and services sector continues to grow in double digits, cement demand is rising and automobile sales also remain strong, pointed Sunil Sharma, chief investment officer at Sanctum Wealth Management.

“We remain in a structural bull market, with a cyclical correction that is already underway in mid-caps and a bear market sell off in small caps,” said Sharma. 

Analysts say companies reporting strong earnings growth and have good outlook, will continue to see traction, but a wide scale earnings recovery was still to be seen to justify the high valuations. 

“My sense is market should consolidate. We have not entirely seen earnings grow and unless that revival is seen through, it will be difficult to give such a high multiple to the market,” said Joshi. 

Sanctum's Sharma says investors should diversify allocations primarily to large cap stocks with some exposure to mid caps. His preference is towards companies that are driven by domestic consumption demand, private banks and healthcare companies among others.