The Nifty index has made significant progress, covering half of the distance between 19,000 and 20,000 in just 10 days. Market experts suggest that this upward trend may not halt at the 20,000 mark. Several factors contribute to this optimistic market sentiment, including the inflow of Foreign Portfolio Investor (FPI) funds, domestic investments, and the promising earnings growth anticipated in the near future.
During the week, Nifty IT witnessed a noteworthy surge of 4.7 percent, with a significant portion of around 3-3.5 percent occurring in a single day. Another crucial development was the decline in the value of the US dollar, particularly breaching the 100 mark on the dollar index. This event is anticipated to attract a substantial influx of capital into India.
Analysts such as Chris Woods from Jefferies compare India's performance favourably to that of China, asserting that India has outperformed its Asian counterpart. Samir Arora of Helios Capital also supports this view, highlighting the ongoing rally as a significant risk-on factor.
Addressing the IT sector, Ridham Desai from Morgan Stanley, recently emphasised that the point of maximum uncertainty often coincides with the point of maximum returns. Despite concerns arising from Infosys' underwhelming performance in the previous quarter, the IT sector has delivered impressive returns.
When observing the three-month trajectory of IT stocks, it becomes apparent that many are currently nearing their 52-week highs. Mid-cap IT companies such as Coforge, L&T Technology Services, Persistent Systems, Tech Mahindra, and HCLTech have shown remarkable growth, with some expected to reach their yearly peak with an additional 5-6 percent increase.
The current rally can be attributed to several factors. Firstly, the market speculates that the worst phase of earnings deterioration has passed. Secondly, the recent decision by the US Federal Reserve to pause interest rate hikes is viewed as a significant catalyst for the recent surge.
It is worth noting that the previous post-COVID rally was driven by the widespread adoption of remote work practices, resulting in cost savings for many companies. Consequently, IT valuations soared, reaching levels of 30 times earnings, well above the historical average of 17-18 times.
However, a subsequent interest rate hike by the Federal Reserve caused a contraction in valuations, with Infosys hitting a low of 17 times earnings. Although a return to the previous peak of 30 times earnings is not anticipated, even a modest increase to levels around 21-22 times, which aligns with the average of the past five years, would signify further potential for this ongoing rally.
While acknowledging the poor numbers and less-than-stellar commentary, market participants believe that the worst is now behind us, and valuations are poised to recover from this point onward.
(Edited by : Pradeep John)
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