Keeping fingers crossed

The stock market bottomed out on the budget day of 2016, when the Nifty 50 hit 6,800. In the next 15 months, equity has soared. The Nifty has returned 21 per cent since February 2016 and mid caps have returned even more. Can we expect this rally to continue? The first and the most essential element for the bull run has been liquidity. Foreign portfolio investors have bought equity worth over Rs 70,000 crore since January 2016, while domestic institutions have bought close to Rs 50,000 crore. Retail participation has also been very positive. That works out to about Rs 7,000 crore/month of net institutional buying on average or a little over $1 billion/month. Second, institutions will pay attention to profit growth. Institutions expect earnings growth to accelerate to around the mid-teens for the major indices, seeing growth at somewhere between 14-18 per cent for the next year or two. If we look at the forward P/E estimates, the implied growth rates are similar or higher. If growth disappoints, there could be an institutional pull-back. Valuations are high but not quite in the red zone according to most institutions. But if EPS growth does not meet projections, valuations could climb

This article was originally published on August 17, 2017.