Nifty, Sensex hit fresh highs on Powell booster, rally still has steam left

IT shares were the star performers in Thursday’s session, with the Nifty IT index jumping 3.5 percent on hopes that the US economy has managed to avoid a recession, and that offshoring orders should resume.

Bulls ran amok on December 14  after the US Federal Reserve in a surprise move hinted it would cut interest rates earlier than expected.

The Sensex and Nifty hit record highs of 21,210 and 70,602 intraday, led by big gains in IT stocks. The Sensex ended the day at 70,528, up 1.36 percent, its best close till date. The Nifty finished at 1.26 percent higher from the previous session at 21,190, another record high for the 50-pack index

The Fed is expected to start cutting rates as early as March 2024, and market observers say the Reserve Bank of India will follow suit shortly.

Also Read: Dovish Fed sparks rally in IT stocks, analysts say now is the time to shop

Foreign funds to flow faster

The Fed’s dovish stance is expected to accelerate foreign fund flows into Indian equities and has come at an opportune time. The market appeared to be facing a liquidity crunch because of the large number of IPOs and share sales by promoters.

So far in December, foreign funds have net bought Rs 16,923 crore worth of shares, enthused by the BJP’s strong performance in the recent state polls.

The prospects of falling interest rates further strengthens the case for India, which is already the most preferred destination for global investors because of its robust macroeconomic fundamentals.

Also Read: Eye on elections: Will FIIs flock to India and front-end investments?

“I don't think the (foreign) money will wait for the rates to come down,” Marcellus founder Saurabh Mukherjea told Moneycontrol, adding that this would also ease the pressure on the rupee.

“The foreign investor will have a lot of visibility, given that the Fed has given its signal, there is healthy economic growth in India, and there is political clarity,” Mukherjea, who expects net foreign fund inflows to be in the region of $40 billion, said.

He expects largecap shares to outperform hereon and the returns in small and midcaps to moderate.

Also Read: Fed's stance change to boost flows, smallcaps remain attractive: Shankar Sharma

IT back in business?

IT shares were the star performers on December 14, with the Nifty IT index jumping 3.5 percent on hopes that the US economy had managed to avoid a recession and that offshoring orders should resume.

Market experts are advising that investors should now focus on stocks where valuations offer comfort, given that the market has run up quite a bit. IT sector appears to make the cut, given that most fund managers are still underweight on the sector. But not everyone is convinced.

“I don’t see a big IT rally,” said Arvind Sanger of Geosphere.

Also Read: As Nifty touches record high, 4 breakout stocks that should be on your radar

More fund managers appear bullish on banking stocks because of the pick up in capex, which will strengthen the corporate loan books of banks.

The bull case for India market is a well-worn story: political stability, stable crude prices, strong corporate earnings, falling interest rates, a strong working population, strong domestic and foreign fund flows.

Watch your step 

But there are risks as well, which are being overlooked at this point.

“We are in a bull market that (usually) tends to end badly,” Raamdeo Agrawal, co-founder Motilal Oswal Financial Services told CNBCTV18.

Many market watchers have highlighted the froth in small and microcap stocks because of the deluge of inflows into mutual fund schemes investing in these segments.

Also Read: These 3 midcap stocks are ripe for a breakout

And this trend is not restricted to smallcaps alone. A recent report by Kotak Securities pointed out that the market was overvaluing certain sectors like chemicals and construction by not accounting for the decrease in cash flows because of capex projects.

Continuing weakness in rural India could prompt the government to announce some major welfare which may not be viewed favourably by the market. Then there is always the worry about the government tweaking long-term capital gains tax in the Budget.

Also, the market is already extrapolating the BJP’s win in the state polls to an outright victory in the general elections. Remains to be seen if institutional investors will be comfortable investing aggressively just ahead of the elections.

Disclaimer: The views and investment tips expressed by investment experts, broking houses and rating agencies on Moneycontrol are their own, and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.