Dubai: Resistance is expected to emerge in Indian stocks after a rollicking rally for the best part of the past five weeks, during which benchmark indices scaled a spate of record highs. A bout of profit-taking is inevitable and essential for a healthy market, but the fundamentals behind the surge remain intact and smart investors should use any dip in prices to accumulate.

Corporate earnings are improving thanks to stepped up consumer spending. The deceleration caused by last November’s demonetisation drive, when 86 per cent of the currency in circulation was pulled out from the market, is firmly behind us and sales of almost everything is picking up. Benign inflation has kept input costs down while companies have succeeded in raising prices.

“The market is due a pause or correction in the short-term,” Laurence Balanco, technical analyst at CLSA Asia Pacific Markets, said in a note. “However, due to bullish long-term profile for the Nifty, any short-term weakness should be seen as an attractive buying opportunity.”

In the event of a correction he expects support to come in at 8,989-9,191, and sees the widely tracked index heading towards 10,350, 11,547 and 12,000.

The 50-share Nifty closed at 9,668.25, stretching a run of weekly gains to five and rising 4.1 per cent over that period. The benchmark, which is mimicked by fund managers for their allocations, hit an all-time high of 9,678.55 on Wednesday, and is up 18.2 per cent this year at Friday’s close.

Goldman upbeat

Goldman Sachs raised its 12-month forecast for the Nifty to 10,400 from 10,000 earlier, noting rising confidence in corporate earnings. It expected earnings growth of 14 per cent this year and 18 per cent in the following year. The global investment bank was overweight on industrials and favoured domestic cyclicals and banks over exporters. It expects rural demand to pick up and capex-sensitive companies will see increasing opportunities.

“Recovery in volume growth for consumer stocks, encouraging domestic order flow trends in industrials, better-than-expected growth and margin trends in banks, and evidence of waning demonetisation impact suggests earnings recovery is gathering pace,” Goldman said.

Earnings per share revisions in India may turn positive in the coming months, it added. Motorcycle maker TVS Motor Company, HDFC Bank and ICICI Bank are on Goldman’s conviction list. However, the brokerage lowered pharmaceuticals and software services companies to underweight.

The top-30 Sensex snapped a four-week rally and closed marginally lower on Friday at 31,262.06, but is up 4.7 per cent over five weeks and has gained 17.4 per cent in 2017. It reached a record high of 31,430.32 on Tuesday.

Too pricey?

Investment bank UBS on Thursday lowered its rating on Indian equities to “neutral” from “overweight”, citing high prices of stocks.

“On our models, India no longer looks so attractive, though much of this on the thematic side is down to the impact of demonetisation negatively impacting earnings in calendar 2018 versus this year’s bounce-back,” Niall MacLeod, head of Asian equity research strategy at UBS Investment Bank, said in a report.

“We take it back to neutral for now, though recognise that a big slowing in the rate of upgrades in the more cyclical parts of the region will inevitably draw attention back to India’s better structural story.”

MacLeod said UBS economists no longer expect the Reserve Bank of India (RBI) to ease monetary conditions again this year.

The RBI kept its main policy rate, the repo rate, unchanged at 6.25 per cent when it reviewed monetary policy on Wednesday, and made no change to its “neutral” stance despite inflation dropping below four per cent and economic growth moving at a slower-than-expected pace.

The central bank’s decision was at odds with the mandarins in New Delhi who have been pushing for lower borrowing costs to help bolster investment and economic activity. If the monsoon lives up to the forecast of normal rains, this could keep inflation benign and pave the way for monetary easing later this year.

Other market pundits say it would be foolhardy to step away as there were good reasons to back the high prices stocks command.

Cusp of change

“We are on the cusp of a major change in trend for earnings,” Geoff Lewis, Hong-based global market strategist with capital markets group of Manulife Asset Management, told the Economic Times. “India will show superior earnings growth to many of the other emerging markets and that’s why the market warrants a premium valuation.”

“The macro outlook for India in the next 12-18 months appears to be solid. It would take some really big negative shocks to derail the recovery,” he added.

Morgan Stanley, whose India focus list features MCX, Shree Cement, Shriram Transport, Zee Entertainment, Cyient, Indian Oil Corp, Lupin and M&M Financial, expects the Sensex to reach 34,000 by June 2018, assuming 16.5 times forward earnings.

Preferred buys of the global securities house include Eicher Motors, Bajaj Auto and Maruti Suzuki among autos. It is also upbeat on Future Retail, Jubilant Food, Reliance Industries, Bharti Infratel, Bajaj Finance, ICICI Prudential and Kotak Mahindra Bank.

In another sign of mounting confidence on the outlook, there is no dearth of capital for companies if you have a good story to tell.

State Bank of India, the country’s largest commercial lender, raised Rs150 billion (Dh8.5 billion) through a qualified placement of shares with institutional investors at Rs287.25 a share.

Demand for the sale was robust, SBI chief Arundhati Bhattacharya said, with foreign institutional investors bidding for more than Rs110 billion. State-run Life Insurance Corp of India asked for half the total size of the offer, while other domestic institutions plumbed for Rs85 billion. Because of the excessive subscription SBI could only accept bids partially.

The writer is a journalist based in India