Sensex hits 54,000 for first time as markets extend gains

Shares in other Asia-Pacific regions were also higher with the Shanghai composite in China, Hong Kong’s Hang Seng and South Korea’s Kospi rising around 1%.

According to Naveen Kulkarni, Chief Investment Officer, Axis Securities the markets rally signify the continuation of the bull run. “With the improvement in key macro data, FIIs turned buyers in the equity market v/s the net sellers in the last month. Further, the recent spate of initial public offerings (IPOs) and their success clearly indicates the appetite for mid and small cap stocks,” he said.

As the markets have continuously climbed in August so far, investor wealth has ballooned by ₹4.05 trillion in the last three days. Even as domestic macro data trends show improvement in July, the divergent trend between economy and equity markets continues to remain stark.

“Such divergent trends should not be surprising, considering that the former is entirely linked with the performance of listed companies, while the latter has a much broader scope,” said Nikhil Gupta, research analyst, Motilal Oswal Financial Services.

The strong performance of the equity market is a reflection of the fact that the gross value-added (GVA) of the listed non-financial companies (NFCs) grew 14% YoY in the second half of 2020 and 36% YoY in the first quarter of 2021. The GVA of the rest of the economy (RoE), however, shrank 2% YoY in the second half of 2020 and grew 6.7% (slower than the pre-covid trend) in the first quarter of 2021, he said.

Sunil Tirumalai, UBS India Strategist, however, does not see much upside to Nifty from the current levels. According to Tirumalai the linkage between CPI inflation and listed stocks has been weak. “However, the flow through from bond markets is real and significant. Our work has shown that an 80 basis points (bps) rise in Indian government bond yields would normally be accompanied by 12% compression in the Nifty price to earnings (PE) multiple,” he said.

Meanwhile, as the Reserve Bank of India is widely expected to maintain the status quo on interest rates, Morgan Stanley feels that while the growth trend is improving, the risks to inflation trajectory will gain more prominence in the monetary policy committee (MPC) discussions.

“We believe that the key to managing policy normalization will be confidence in growth recovery. In our base case, we expect growth recovery to be sustained and that will give confidence to the RBI to start with policy normalization in first quarter of 2022,” said Morgan Stanley in a note on 3 August.