Sensex tops 19,000 on reform hopes, liquidity; realty soars

Moneycontrol Bureau

Equity benchmarks closed at their highest levels in 17 months ahead of the Cabinet meeting to discuss foreign direct investment in the insurance and pension sectors, among other key Bills. Brokers said the market is hopeful that the government will be able to push through important economic reforms in the coming months to put the economy back on track.

The 30-share Sensex gained 188.46 points or 1 percent to close at 19058.15, and the 50-share Nifty rose 56.35 points to finish at 5,787.60. Realty and banking shares were the star performers of the day, with stocks like DLF (+ 5.4 percent), HDIL (+ 5.7 percent) SBI (+ 2.13 percent) and ICICI Bank (+ 3.05 percent) figuring on the list of big gainers.

With the government finally showing resolve to take some tough decisions, investors appear to be already pricing in an impending recovery in the economy. But the market may have run ahead of itself in the short run considering the challenges facing the economy.

Last week, the Kelkar Committee on fiscal consolidation warned that the economy was poised on the edge of a "fiscal precipice” and recommended phasing out subsidies, the ideal but politically difficult solution.

Rating agency CRISIL today said its credit ratio (ratio of upgrades to downgrades of companies’ credit ratings) declined to 0.66 for the half year ended September, compared to 0.91 during the second half of 2011-12. CRISIL said that the credit ratio may be close to its bottom as pressure on profitability and on economic growth are showing signs of abating. But it cautioned that an improvement in credit ratio could still be some way off.

“Material improvement in credit ratio will, however, take time and need substantial revival in demand. Over the near term, rating downgrades will continue to outnumber upgrades, although their severity and intensity may decline,” said the CRISIL note.

A similar note of caution was sounded by brokerage house JP Morgan in its report earlier this week, saying that companies needed to start investing for the economy to recover.

“These data prints (IIP, inflation) will need to turnaround soon before market’s patience runs out and concerns over India’s growth performance could well outweigh the euphoria of the policy blitz. As we have been arguing for many months a turnaround in the pace of activity requires corporates to start investing,” said the JP Morgan note.

Apart from positive sentiment, the rally is also being driven by a massive inflow of foreign funds. In September alone, foreign funds net bought nearly USD 4 billion of Indian equities, taking the cumulative tally for 2012 so far to around USD 16 billion.

Mark Mobius of Franklin Templeton believes emerging markets (India included) will benefit from the easy monetary policy of the US Federal Reserve in the short term.

“The Fed will likely continue to pump money into the market until it sees a significant improvement in the U.S. unemployment rate. In my opinion, this can be positive for investors in emerging markets, at least in the short run. There is lots of cash in the system right now, and I would expect more institutional flows into stocks generally. Some of those flows could wash up on emerging and frontier market shores,” Mobius wrote in his blog.

With the second quarter earnings season getting underway in a couple of days, investors will have a better idea of whether the market can sustain current valuations.