Breakout on Sensex will add to market strength; 4-5 percent rally on cards in 2017

The Nifty50 rose slightly to a fresh record high of 10,178 on Tuesday but then quickly pared gains as traders preferred to book profits ahead of US Federal Reserve policy outcome on Wednesday.

The Nifty50 witnessed a breakout on Monday as it surpassed its previous record high of 10,137 but the S&P BSE Sensex was still 260 points away from its record high of 32,686.48.

The breakout will be more effective if both indices i.e. S&P BSE Sensex and Nifty50 hit record high simultaneously. Most analysts on D-Street are hoping for the rally which could stretch by 4-5 percent for the rest of 2017.

However, failure of Sensex to surpass its previous record high in the immediate short term could result in a correction as well, suggest experts.

“While Nifty has breached its previous high, Sensex is nearly 0.65 percent away from its previous high. A breakout on the Sensex will add to the strength of the broader markets until then this move can be questioned,” Paragnesh Jain, AVP Technical Research - Institutional Equities, Systematix shares told Moneycontrol.

However, a failure to Sensex to surpass its previous high can lead to a correction, he said.

The only negative factor which could dash hopes of retail investors are the FOMC meet in the US and any adverse news flow with respect to geopolitical tensions between North Korea and the US could result in a knee-jerk reaction.

But, most analysts on D-Street remain optimistic on the strength of the rally which was led by strong flows from domestic institutional investors (DIIs) at a time when foreign investors were dumping equities. FPIs remain net sellers in August and so far in September.

The Nifty50 witnessed a phenomenal rally of over 24 percent on a YTD basis in 2017. It crossed all-time high after a lag of 30 trading sessions mainly aided by favorable macro scenario, continued the flow of easy money, healthy inflows into MFs through SIPs and policy reforms with improving the visibility of government’s stability beyond 2019, suggest experts.

“On the back of waning impact of GST roll-out and low base effect, we expect the corporate earnings to improve in 2HCY17. We remain positive and expect the market to witness another4-5 percent rally by Dec’17,” Rakesh Tarway, Head - Research, Reliance Securities told Moneycontrol.

A Large part of the rally which we witnessed in 2017 was driven by domestic institutional investors which pumped in close to Rs 20,000 crore in the previous month which was also all time highs.

Amid strong liquidity and weak fundamentals, investors are advised to stay cautious. The rally could stretch towards 34000 on the Sensex and around 10,700 on the Nifty in 2017, but stock picking will be crucial.

“The domestic flows into equities remain strong, more than offsetting the weak trend in FII flows since August 2017. Furthermore, the global sentiments have reverted to buoyancy as geopolitical tensions news flows seemed to have ebbed as of now,” Pankaj Pandey, Head of Research, ICICI Securities told Moneycontrol.

“Going forward, with positive undercurrent in the economy driven by ongoing reforms (including GST), stable commodity prices and normal monsoon, we have a positive outlook on the domestic equity markets and expect Sensex earnings to stage strong double-digit recovery (15.7 percent CAGR) over FY17-19E,” he said.

Pandey said that ICICI Securities CY17/FY18 end Sensex target is at 34,500, valuing the index at 18.4x P/E on FY19E EPS of Rs. 1878. Corresponding levels for Nifty will be 10,750.