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Stock Market: Home Bred Kingmakers

The consumption story that has been the key driver for many sectors may now be driving the stock market itself

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Judging the way the stock markets have been swinging ever since the start of 2017, the party seems to have only just begun. The occasional pull-back in stock prices is being increasingly seen as the green light by investors to dive into favoured stocks again. These small corrections are short-lived, and stocks are quickly back to doing what they like to do at present — and that is to go dance up.

The result? The bellwether index crossed a new high in March and, with the Nifty at around 9200, chances are that markets could hit the coveted 10000 gong before 2018. Perhaps, much earlier.

By all accounts, this is a crazy bull market, fuelled by the vast domestic inflows to the market. If the demonetisation has done something right, it seems to have channelled more money in the direction of stocks.

Domestic institutional investors (DIIs) are increasingly pouring money into the stockmarket. Regular investments in the form of SIP are the new rage. At current value, more than Rs 4,000 crore of hard cash is making its way into the stock market every month through SIPs.

To give a perspective, this used to be the kind of sums foreign institutional investors (FIIs) put in Indian markets a few years ago. In 2008, FIIs sold stocks worth Rs 60 crore-70 crore; now DIIs alone are pouring in sums nearly equal that in a year.

By 2018 or so, the amount of money coming through the SIP route is expected to comfortably rise by 50 per cent. This means a cool Rs 6,000 crore-plus is expected to flow into the markets via SIPs. If this continues, widening whispers in market circles say: Who needs FIIs anymore?
For a long time now, the Indian markets have been dominated by the FIIs, and their sheer size meant that they dictated market’s direction. If they withdrew, domestic stocks would most certainly get whipsawed.

But despite major selling by FIIs since September 2016, Indian stocks have been holding up beautifully on their own. FIIs sold stocks worth Rs 31,221 crore in the last quarter of calendar year 2016, but DIIs seemed to have risen to the occasion, more than matching the selling by buying stocks worth Rs 32,082 crore in the same time frame. As a result, stocks did not cave in but held up quite well during the period of demonitisation.

Not only that, all but a few sectors performed handsomely over the last year from traditional defensive sectors to oil & gas, telecoms, commodity stocks, autos, and even real estate. Infrastructure stocks, which have been languishing for some time now, are also getting a bump up as demand has taken a turn for the better.

In fact, barring the S&P BSE IT index, which dropped 10 per cent on visa issues, nearly all the 26 major sub-indices of the BSE stepped up last year. However, some sector indices such as the S&P BSE Metals and S&P BSE Oil and Gas sub-indices have delivered more than 50 per cent gains last year, to be precise nearly 59 and 54 per cent ,respectively.

On the market-cap front, both big and small companies are on the rise if indications are anything to go by. Of course, mid- and small-cap companies have been rising faster than the large-caps because demand for these stocks from domestic and high net-worth investors is snowballing. The S&P BSE Midcap and Smallcap indices have gained 34 and 37 per cent, respectively. But, the large-cap dominated S&P BSE Sensex has done well, too, gaining 19 per cent.

Investors are seemingly not too worried about the soaring valuations of the market, either. The frontline bellwether Nifty is quoting at PE of 23.42 times the market, whereas the smaller indices such as the BSE Midcap PE at 31.22 and the BSE SmallCap PE at 68.2 are at stratospheric levels.

Yet, investors are still loading up on small- and mid-cap stocks, going by the way prices of some of these companies have moved in recent times. Also, more than 10 per cent of the stocks trading in the market are quoting at life-time highs.

According to market experts, barring unforeseen circumstances, the Indian markets will continue to be a buy-on-dips market because the domestic investor is just getting started. The consumption story, which has been driving many of the sectors in the stock market, is now piloting the stock market itself.

There is plenty of optimism on all sides. Globally, even news of the US Fed hiking the interest rate was considered an opportunity to buy. Lately, the rise of geopolitical tension in West Asia has raised a red flag in the market. But, given the new-found optimism of the Indian middle-class, this too will be utilised by savvy investors to buy into the Indian markets.

However, investors should not throw caution to the winds. Stock prices always react to earnings in the long run, and that is non-negotiable.

Hence stick to quality companies that still have plenty of earnings steam left. For the last three years, the lack of earnings has been the one sore point of this market. And, if overall earnings growth disappoints again next year or so and the broader market prices react, investors would have at least stuck to the basics of erring on the side of quality companies.