Dalal Street near all-time highs: Here are top 5 factors ensuring the rally

One month can be a long time in financial markets and the last month has seen a big turnaround in both news flow and sentiment when it comes to Dalal Street. The result – all-time highs on the Sensex and a near-all time high on the Nifty and the Bank Nifty.

The turnaround has been quite swift from the lows just before Diwali. At that time, the market had cooled off after the mega-corporate tax cut announcement with the Nifty hitting a low of 11,090 on October 10. There were gloom and doom talk all around with the PMC Bank crisis blowing up and macro data remaining weak.

From that point on, Nifty has managed a smart 8 percent recovery in just a month scaling peak 12K in the process. So what changed? Here are the key triggers that have got the bulls charging again.

The months of October and November have seen a resurgence in FII flows which had turned negative in the earlier part of this year. The money coming into India is part of a global tide of dollars flowing into EMs. Markets around the world have been in high spirits with the Dow & the S&P 500 at record levels. The global risk-on sentiment has also helped India with Over Rs 24,000 crore flowing into the equity market in Oct & Nov so far.

The Q2 earning season was largely an uneventful one. As expected several companies took the advantage of lower tax rates reporting good profit growth. The weakness in autos was priced-in & banks didn’t spring any major nasty surprises wrt NPAs. On the contrary, SBI’s numbers heartened the street as the Bank reported improving asset quality & gave a strong outlook on growth.

The real shot in the arm for bulls came earlier this week in the form of Supreme Court’s landmark Essar Steel Verdict. The judgment cleared all confusion, putting financial creditors at the top of the payout hierarchy paving the way for other stressed asset resolutions to go through as well.

This long-awaited clarity has fired up PSU bank stocks as the market expects many of these banks to report smart recoveries over the next few quarters. In fact, the SBI Chairman told CNBC TV18 that 2020 will be the “best year for recoveries” for PSU banks in a long time.

Another positive announcement is the government’s move to set in motion a specific framework for resolution of stressed NBFCs- a step forward in hopefully resolving large stressed finance companies like DHFL. The financial sector has seen more good news from the money markets as well with interest rates cooling-off – interest rates for top-rated borrowers for 3-month paper have fallen to levels below the repo rate. The easing of liquidity conditions and falling rates augurs well for overall risk sentiment.

The bulls' enthusiasm has also been boosted by the government’s commitment to strategic divestment. While it remains to be seen if the government will indeed go the distance and lower its stake to below 51 percent even in its marquee assets, the idea has gone down well with market participants. “This will be great news not just for the companies in question but also for the macros and the fisc,” says Morgan Stanley’s Chief India Equity Strategist, Ridham Desai

Last but not least, this week has seen hope where there was nothing but gloom and despair. With their back against the wall and existence of some players under question, telecom companies finally bit the bullet declaring their intent to raise tariffs. While details are not yet known and the quantum of these hikes isn’t clear, the market has latched on to hopes of an end of the crippling tariff wars. It is also expecting & pricing in some supportive policy action from the government to keep businesses viable.

To wrap up, dollar inflows, positive policy action and resolution of long-standing stressed assets has fired up the bulls’ imagination. Most market participants don’t seem too perturbed by weak macro data like IIP or electricity demand as it’s backdated. The green shoots are real, but the question, perhaps, is whether they can bloom into a full garden.