Street takes cheer from poll results, but will the gains sustain?

Markets raised a toast to the thumping Maharashtra mandate, lifting stocks for a second straight day as bargain hunters returned.

Benchmark indices extended Friday's gains to Monday, with the Nifty clocking the biggest two-day rise since early June. However, market experts are unsure if the gains will sustain or prove to be fleeting.

After tumbling 11% from its 1 October record, the Nifty has in two sessions recouped nearly 4% from its recent low on 21 November. The recovery was led by a surge in stocks like Power Grid Corp. of India, Larsen & Toubro, Tata Consultancy Services, UltraTech Cement, and Apollo Hospitals Enterprise.

Foreign institutional investors net purchased Indian equities worth ₹9,948 crore, while domestic institutions net sold shares worth ₹6,908 crore. The HDFC Bank stock rose 2.3%, contributing the most to Monday's gains, as the increase in its weighting in MSCI indexes took effect. According to Nuvama Institutional Equities, India may witness about $2.5 billion net passive FII flows thanks to the MSCI rejig, including $1.9 billion in HDFC Bank.

Manish Sonthalia, chief investment officer of Emkay Investment Managers, termed the recovery as a “possible temporary pullback” after a relentless fall. Despite a good harvest, government spending and wedding season fuelling demand, what's worrisome is that a permanent bottom has yet to emerge, he said. “With the low-hanging fruits already picked, the strategy of buying on dips no longer holds. Additionally, the slowdown in earnings growth raises the likelihood of valuation derating in the near future.”

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Goldman Sachs said in a 19 November report that India's slowing economy is hurting corporate earnings. September quarter earnings of MSCI India companies missed analysts' expectations in the third quarter, with misses outpacing beats. "Consequently, MSCI India CY2024 earnings saw sharp cuts of 3% over the past six weeks, erasing all the upgrades seen in the first three quarters of the year,” the report said. More importantly, earnings sentiment, which tracks the breadth of analyst revisions, has significantly worsened for the broader BSE 200 index over the past month to reach two-year lows, it added. Analysts at Goldman Sachs expect the downgrade cycle to continue in the coming quarters.

On Monday, both Nifty and Sensex closed 1.3% higher at 24,221.90 and 80,109.85 points respectively. Among sectoral indices, Nifty PSU Bank, Nifty Realty and Nifty Bank were the best performers, rising 2-4%.

Interestingly, the Nifty had slipped below its 200-day moving average of 23,550 points, but has since reclaimed this critical level, noted Kkunal Parar, vice-president at Choice Equity Broking. This suggests the recovery still has momentum, he added. “If the Nifty 50 crosses the 24,500-point mark, there’s a strong possibility it could set a new all-time high,” Parar said.

FIIs have been net sellers in the recent past, pulling out ₹91,933.6 crore in October and ₹12,242.25 crore in November till Monday. The indictment of Adani group executives in the US has added to the unease among investors.

However, some market experts believe that continuing nervousness has opened up an opportunity to play India's multi-year growth story.

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Vikash Kumar Jain, investment analyst at CLSA, said last week that a relief rally could be building, supported by easing FII selling, sustained DII buying, and ongoing IPO enthusiasm. On Friday, CLSA had raised its India allocation to 20% overweight, while slashing its exposure to China in a tactical reversal.

Ashish Gupta, chief investment officer of Axis AMC, said one needs to monitor whether earnings growth improvement occurs in the second half of this fiscal year. “If it continues to disappoint, then the market momentum could get disrupted,” he cautioned.

In addition to the earnings growth trajectory, Gupta says investors should keep an eye on the strength of the dollar and US yields under the Trump presidency. US bond yields have surged from 3.6% to 4.4%, prompting foreign investors to turn net sellers. Rising US yields have been a headwind for equity investors, especially those relying on foreign capital inflows. While the rupee has remained relatively stable compared to other currencies, the dollar's continued strength and currency depreciation in other emerging markets, including China, could pose challenges. “In such a scenario, the RBI will need to determine the appropriate rupee level,” Gupta said.