MUMBAI: Equities rallied for a second day as sentiment reversed following the unexpected corporate tax announcements last Friday. The Sensex shot up by over another 1,000 points, and traders point out that the rally has been picking up specifically on the likely beneficiaries of the lower taxes.
While Friday’s rally was mostly short covering, Monday’s moves pointed to stock picking from the banking, finance, oil companies and consumer space. "This isn’t a bubble. This rally is based on the tangible fact of tax cuts. There are definite gains on the earnings side for companies from the tax cuts. That is why even among mid-caps, select stocks have moved up," said a veteran trader.
The Sensex has gained 3,000 points in two sessions, reclaiming 39,000, and the Nifty is above 11,600, both inching closer to their all-time highs.
Market sentiments, for now, have changed towards the positive for equities. Though the two-day rally isn’t a reason for worry, investors need to be cautious if this continues without a correction in days ahead, experts said.
“Agree that what is going to be a benefit derived from tax cuts is already discounted in the prices. But, in the US, the tax cuts did percolate into earnings, which was discounted in advance,” said Anita Gandhi, Director, Arihant Securities. Right now the rally is based on the immediate gains of the tax cuts, and the impact of it on the economy would determine the future course, she said.
“The corporate tax rate cut is a structural move. It would improve corporate earnings estimates by around 10-15 per cent, giving a northwards inflection (to the flat earnings so far), which would be further backed by investments and, subsequently, consumption-driven demand,” said Arun Thukral, MD and CEO, Axis Securities.
Motilal Oswal estimates that Nifty Earnings Per Share will see an 8 per cent upward revision from the corporate tax cuts. “Out of 50 Nifty companies, 21 will see an EPS revision upwards of 10 per cent, and nine companies between 5-10 per cent ceteris paribus (other things being equal),” it said, pointing out that private banks, auto and consumers would be the biggest beneficiaries.
IT stocks that were picked up as safety bets when the markets were down aren’t the beneficiaries of this rally. Even among financials, the banks that save on tax with the latest cuts have moved up, but the insurance stocks haven’t moved up.