Liquidity drives rally, Sensex regains 19,000


A wave of liquidity flooded global equity markets on Monday, sweeping Indian stocks to a 32-month high.

The benchmark equity index of the Bombay Stock Exchange, Sensex, rose 2.17%, or 408.67 points, to 19,208.33, a level last seen in January 2008. The broad- er 50-stock Nifty index on the Na- tional Stock Exchange gained 119.95, or 2.13%, to 5,760.

Some analysts attributed the rise to better-than-expected pro- duction data from China and In- dia on Friday and lenient norms for banks' recapitalization. How- ever, most market participants remained bemused by the rise, suggesting that fundamentals don't quite justify it. They said the rally would continue as long as liquidity continued.

“Liquidity is the only reason behind the rally,“ Tarun Sisodia, head of research, Anand Rathi Fi- nancial Services Ltd, said.

The flow towards stocks world- wide is, in part, being driven by record low interest rates in the Western world. The 2.8% yield on US 10-year bond, for instance, is forcing investors to look towards equities to make higher returns.

Stocks rose across Asian and European markets. The Singa- pore market, for instance, neared 30-month highs on Monday, driven by liquidity. Its Strait Times index closed 1.5% up on 3,066.81. Hong Kong's Hang Seng index gained 1.9% to close at 21,658.35.

A 25 August Morgan Stanley and Co. report, citing data col- lected by EPFR fund research, said cumulative inflows to emerging market equity funds to- talled $91 billion (`4.2 trillion) since January 2009. In India, for- eign institutional investors bought stocks worth `2,519 crore on Monday, provisional data from the Bombay Stock Ex- change showed.

To be sure, the immediate trig- ger for the rally could be the posi- tive economic news over the weekend, some analysts said. China's industrial output rose a better-than-expected 13.9%, sug- gesting that its growth momen- tum continues. India's industrial production index rose an unex- pected 13.8% from a year ago in July, against 5.8% a month ago.

Bloomberg cited US govern- ment figures on Friday that said initial jobless claims in the US dropped by 27,000 to 451,000 in the week ended 4 September, the lowest in almost two months.

However, such factors are “ex- poste justifications“, said V.
Anantha Nageswaran, chief in- vestment officer at Julius Baer and Co., and Mint columnist.
“I'm not able to figure out who's buying at these levels.“

Indian stocks are trading at high multiples of earnings and “valuations are expensive“, said Satish Ramanathan, who helps manage `13,218 crore assets at Sundaram BNP Paribas Asset Management Co. Ltd.

The Sensex is trading at 22.83 times trailing earnings compara- ble with the 24.47 times in Janu- ary 2008 when the market reached a record high.

However, with prospects of both global and domestic recov- ery looking brighter, banking stocks led the rally.

The BSE Bankex index rose 3.62%, followed by the Oil and Gas Index 2.57%. State Bank of India, which rose 5.52% to close at `3,147.25, and Housing Devel- opment Finance Corp. Ltd which rose 5.32% to close at `664.15, were the top gainers among the Sensex companies.

“Liquidity has been fairly strong and it's difficult to forecast which way it'll turn,“ said Vetri Subramaniam, head of equity funds at Religare Asset Manage- ment Co. Pvt. Ltd, who helps manage `10,584 crore. “The out- look for earnings growth still re- mains high. We are looking at those numbers to help support the market.“

ravi.k@livemint.com Ashwin Ramarathinam contributed to this story.