Markets high on Modi, but wary of hangover

Stock market indices jumped to record highs on Friday as foreign institutional investors (FIIs) stepped up purchases ofdomestic shares, encouraged by stability in the rupee. TheSensex clocked a record for the second straight session while the Nifty surpassed its previous high of December 9 last year. But not everyone on the Street was rejoicing as the rally was led by battered domestic sectors such as banks, real estateand infrastructure, a deviation from the usual leaders such asinformation technology and pharmaceuticals.

A large section of fund managers, who had cut exposure to these shares to the bare minimum, had to scamper to buy them on Friday despite bleak earnings prospects to avoid underperformance.

Fund managers said heightened hopes of the Narendra Modi-led Bharatiya Janata Party (BJP) forming the next government were driving the frenzy in those shares. Many market participants are unimpressed with the gains of Friday because the rally has not been broad-based, though the general consensus is that further gains are in the offing.

“This is clearly a liquidity-driven rally where the high-beta sectors and stocks that are under-invested in are leading the charge. The market is running ahead of the fundamentals,” said Ritesh Jain, chief investment officer, Tata Asset Management.

The BSE’s Sensex rose 405.92 points or 1.89 per cent to a new closing high of 21,919.79 on Friday after touching 21,960.89. The NSE’s Nifty rose 125.50 points or 1.96 per cent to close at 6,526.65, off its all-time high of 6,537.80.

“The market will scale new highs as the (election) outcome becomes more and more certain. There is going to be a management change in India, that’s something that the market is taking for granted. This optimism is moving the market,” said Raamdeo Agrawal, joint MD, Motilal Oswal Financial Services.

FIIs net-bought shares worth about Rs 2,577 crore on Friday, extending their purchases to the 17th straighttrading day. In these 17 days, these investors have poured about Rs 9,500 crore into Indian stocks. Some analysts say a large chunk of the inflows on Friday could have been from global exchange-traded funds (ETFs), which are known to flood the market ahead of key events or when the undertone is optimistic. ETFs usually invest in the Sensex or Nifty as a basket.

Brokers said that could be the reason why the broader market ended weak. Across the BSE, declines outnumbered advances by 1,466 to 1,354. The BSE’s mid- and small-cap indices fell 0.2 per cent each. Another sentiment indicator, the Volatility Index (VIX) — a measure of traders’ expectations of near-term risks in the market — also reflected that a section of the market was uncomfortable with the market rally. The VIX shot up 15.5 per cent to 16.72 on Friday, showing traders were buying options as insurance against any possible fall.

The BSE’s banking and real estate indices soared over 5 per cent each, their highest intra-day gains since September 2013.

“Expectations are high that the next government would be pro-business and revive the country’s investment scenario,” said Jain. The rupee extended its gains for the fourth straight day on the back of dollar flows from FIIs. The currency ended at a three-month high of 61.09 a dollar compared with its previous close of 61.12 a dollar. The rupee had ended at 61.04 a dollar on December 10.

However, the gains were limited due to dollar buying by banks during the market closing hours.

The dollar buying was for meeting the needs of public sector oil marketing companies (OMCs). According to estimates by currency dealers in state-run banks, the dollar demand of these public sector OMCs is in the range of $6-7 billion per month.