The Indian markets have been consolidating over the last month with NIFTY/SENSEX hitting new highs of 9532/30712 on 17th/19th May 2017. Investor sentiments are buoyed towards a further upside over the next year. There has been very strong DII buying in the last 12 months. The number of SIPs in the mutual fund industry has doubled in the last three years. From 51.96 lakh SIPs in 2013-14, they have more than doubled to 1.28 crore by March 2017. SIPs, which collected Rs 1,206 crore per month in 2013-14, got more than Rs 3,989 crore in March 2017. SIPs have caught the fancy of retail investors with volumes hitting an all-time high of Rs 4,200 crore a month in April 2017. Domestic Mutual Funds have been net buyers in Indian equities of Rs.66554 cr in the last 12 months.
The markets are at all-time highs currently and sentiments are positive from both DIIs & FIIs. The initial trend in March quarter results have been positive especially for banks. NPA levels declared by most banks till now have been lower sequentially with the exception of a couple of private banks. Although there has been some profit booking by FIIs as they have been net sellers, it has more than been offset by very strong inflows in domestic mutual funds which have been net buyers. Domestic capital by nature is more stable than foreign capital & this should provide strength to the markets. Though a minor correction may be on the cards a major fall is unexpected.
Current valuations are on the higher side as Sensex is currently trading at a P/E band of 22-24X. Thus corporate earnings have to keep improving every quarter to sustain markets. Crude prices are again below $50/ bbl and a sharp appreciation in the Rupee against the USD will help in a further decline in crude import bill. Crude prices are unlikely to decline sharply from current levels given global economic growth. Gold prices amongst other metals are also stabilizing in a range. We expect global metal prices to consolidate with a positive bias as global demand improves. There has been a significant shift in strategy for IT companies with news of large layoffs in India & recruitment in USA. How it pans out over the next few months needs to be seen. GST is likely to be implemented from 1st July 2017 and the tax rates for different goods/services have just been announced and have largely been in line with expectations with minor deviations from case to case.
Given that the markets are at all-time highs one needs to tread with caution at current levels as a correction due to lower than expected results or strong profit booking cannot be ruled out. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named 'The Tortoise'