“The economic cycle seems to have bottomed out and we are likely to see an improvement in the macroeconomic indicators. We expect earnings to dramatically improve 15-20 per cent over the next two years as corporate earnings return to normal with the bad news already priced in. This revival in earnings could also see the return of FPI interest in Indian markets
and build in $8-10 billion of net inflows in 2018,” said Mahesh Nandurkar, India strategist, CLSA.
Banking stocks continue to be in the forefront of the rally as investors expect the lenders to benefit the most from the revival in the economy.
The sectoral index for banking stocks in the BSE gained 1.6 per cent on Tuesday. Shares of SBI, India’s largest public sector lender, climbed 3.9 per cent – the highest for any Sensex constituent. Shares of ICICI Bank and Axis Bank closed three per cent and 1.3 per cent higher, respectively. Tata Steel, ONGC and Coal India were among the other top gainers, with each of them going up more than three per cent each.
According to market analysts, the surging crude oil prices could be a headwind for the market over the next few months. This could shoot up the inflation and widen the fiscal deficit. Crude oil has gained 25 per cent in the past one year and is currently trading close to $70 a barrel. The level is still lower compared to its previous high of $140 per barrel in 2014, however, analysts caution that the macroeconomy could come under strain if oil price rise another $10 a barrel from the current levels.
“Rising oil prices in the global markets
put a lot of pressure on the Indian economy. Whenever the prices go up, the inflation shoots up and the fiscal deficit also increases. The current oil prices are looking relatively expensive, and in order to absorb the shock of rising oil prices, the government may have to do a balancing act by reducing excise duties so that it doesn’t impact the inflation,” said Deven Choksey, managing director, KR Choksey Investment Managers.
Broader markets also face headwinds as stock prices in this space have risen sharply despite lackluster earnings. This has led to a surge in the valuations with the BSE mid and small-cap indices on the BSE currently commanding a price to earnings (p/e) multiple of 48 and 112 times, respectively. After beating Sensex for four consecutive years in terms of returns, the broader markets are already showing signs of underperformance. While the Sensex has rallied more than six per cent during the year so far, the BSE mid and small-cap indices have only managed to go up by 1.4 per cent and 2.2 per cent, respectively.