Sensex rallies 3,200 pts in 2 days! History shows it's just the beginning
NEW DELHI: A 1,300-point jump in the BSE Sensex on Monday, following a 1,921-point rally on Friday, took Dalal Street investors by surprise. The gains forced the bears to run for cover ahead of September F&O expiry.
Following Friday's corporate tax cut, a host of foreign brokerages have increased allocations to India in their model portfolios, while analysts on Dalal Street have also raised year-end targets for Sensex and Nifty by 11 per cent. If history is anything to go by, these targets look quite achievable.
In the last seven years, there have been six instances (before last week) when Nifty has seen an intra-week rebound of 5 per cent or more. Every such instance was followed by a 3-13 per cent jump in the three months that followed, barring one instance, when it rose 11-25 per cent in the year that followed.
For example, a 5.32 per cent intra-week rebound during the week ended November 2, 2018 on hopes of US-China inching towards a trade deal and a sharp drop in crude oil prices was followed by a 3.23 per cent rise in the index in the following month and 11.33 per cent gain in the next six months.
A 5.71 per cent rebound during the week ended May 27, 2016 was followed by a 5.10 per cent rally in next three months. Similarly, a 9.66 per cent recovery in Nifty50 during the week ended March 2, 2016 was followed by a 16.19 per cent bounce in next three months and 25.24 per cent jump in the six months that followed.
On an average, Nifty delivered 9.51 per cent return in the next three months and 13.63 per cent in the year that followed in every instance, suggests a study by YES Securities.
On Monday, BSE Sensex soared over 1,300 points in early trade to hit a high of 39,346. It later gave up some gains to trade 800 points higher at 38,819. Nifty, on the other hand, zipped past 11,650 level in early trade. It traded above 11,500 at the time of writing this report.
"The government measures are unprecedented in terms of courage. To prefer growth to fiscal prudence is also a bold measure. We are in for a significant recovery in the economy and market. There could be some profit taking, but the medium-term outlook is fairly positive. After Monday's rally, we see another 5 per cent rally in the benchmark indices, but quality midcap and smallcap stocks should jump much more than that," said G Chokkalingam, founder and MD, Equinomics Research and Advisory.
A total of 79 per cent of the participants in an ET poll among fund managers and heads of research at brokerages felt the worst is over for the market. Half of the respondents see Nifty between 12,000 and 12,500 levels by the end of the year, logging almost 11 per cent gain from its current level.
Christopher Wood of Jefferies in his GREED & Fear report advised Indian equity investors to celebrate tax cuts now and leave worrywarts to worry about fiscal deterioration.
"GREED & fear will, accordingly, raise the weighting in India by three percentage points in the Asia Pacific ex-Japan relative-return portfolio and reduce it for Indonesia by two percentage points and take one percentage point from China. This leaves GREED & fear 'double overweight' India relative to the benchmark," he wrote in the note.
Nomura India, which has raised March 2020 Nifty target to 12,545, said it expects a potential 7 per cent increase in earnings in FY20/21.
"We believe the step has significant positive implications for corporate profitability, the broader economy and market valuations. We expect the strong monetary stimulus in the near term to result in a cyclical recovery followed by investment/exports-led growth in the medium term," it said.
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