Markets surge on reform hope

Hopes that the government's stalled economic reforms programme could be back on track lifted the country's benchmark indices. A day after the UPA won the vote on foreign direct investment in retail in the Lok Sabha, and on the day the BSP said it would support the government on the issue in the Rajya Sabha, brightening the prospects of the measure sailing through, the 30-share Sensex hit a new 19-month high while the 50-share Nifty was at a 23-month peak.

The Sensex was up 94.94 points or 0.49% at 19,486.80, while the Nifty gained 30.40 points or 0.5% to 5930.9. The ' gains were led by interest rate-sensitive companies that added between 2% and 3% on Thursday. The Bank Nifty, the NSE's sectoral index on banks, rallied more than 1% to a two-year high.

The market's recent rally, which was triggered by Goldman Sachs upgrading its outlook on Indian equities, is further powered by expectations that the government will strengthen its reforms stance post the FDI debate in parliament. Goldman joined other foreign brokers including JPMorgan, Morgan Stanley, Deutsche Bank and UBS that had raised their outlook on the Indian market in the last six months.

In fact, the Indian market has outdone not only those in BRIC peers but also most Asian counterparts. Having gained more than 5% in the last seven trading sessions, both the Sensex and Nifty, with year-to-date gains of 26-28%, are two of the best-performing emerging market indices.

In contrast, China's Shanghai Composite is the worst performer, having lost close to 8% during the year. The benchmark indices from Brazil (Bovespa) and Russia (Micex) have added a meagre 1.5% and 2.5% in 2012, in that order.

Even after its outstanding performance, the Sensex is quoting near its long-term valuations.

At the current level of about 19500, the index is trading at 17 times its 2012-13 earnings and 14 times to that of 2013-14. On a standalone basis, the Sensex valuations (price to earnings multiple) look competitive to that of Jakarta Composite and Thailand's SET but cheaper than both Taiwan's Taiex and South Korea's Kospi. While net inflow from foreign institutional investors (FIIs) so far this year was $20.7 billion, South Korea saw $12.4 billion worth of stock purchases by FIIs in the period.

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