Santa Claus seems to have come a month earlier to Dalal Street, bringing in much cheer for investors in a slowing economy. The benchmarks Nifty 50 and the S&P BSE Sensex hit record highs of 12,126.05 and 41,100.82, respectively, in early trade on Tuesday. Stock market veterans expect the Indian equity markets to scale new peaks in the days to come.

The bulls may be deriving strength from positive global cues. Expectations are high that the U.S and China may ink a trade pact by the end of the year. Reports suggest the two largest global economies may settle points of friction sooner than later. Besides, the rally in major global economies has extended confidence to domestic investors, too. Furthermore, foreign investors have increased exposure to Indian equities, emboldened by a slew of recent pro-growth reforms announced by the government.

“Indian equities, as usual, don’t look cheap on standard international valuation comparisons but they do offer interesting opportunities. Sector-wise, we are the most constructive on the domestic-driven sectors, as they could be the main beneficiaries of the large-scale tax cuts and the monetary easing. We like industrials as their profitability could be supported by the tax cuts and they are likely to expand their capacity. We also like consumer sectors as consumption recovery is possible, given the rate cuts,” said Markus Mueller, managing director, global head of chief investment office at Deutsche Bank Wealth Management, in an interview with Fortune India.

Hectic buying across sectors, and large- and small-cap stocks, also helped lift the market. Top gainers comprise Hindalco, Sun Pharma, Reliance Industries, ITC, and Asian Paints, while laggards include Zee Entertainment, Grasim, Nestlé, Bharti Airtel, and Bharti Infratel.

“While the initiatives taken by the government and the Reserve Bank of India will take time to work on the ground and reflect in numbers, the market is focussing on long-term reforms. Improvement in global cues is also aiding sentiments. While the Nifty 50 valuation at 22x FY20 is not cheap, we believe the current momentum can sustain in the near term on the back of liquidity flows and positive sentiment,” said Siddhartha Khemka, head–retail research, Motilal Oswal Financial Services.

However, it is not easy to ignore the headwinds facing the foundering domestic economy. Sanjeev Prasad, managing director and co-head, Kotak Institutional Equities, explains the rich valuation of the Indian market is at odds with the weak state of the economy and so is the large price-value gap for both ‘growth’ and ‘value’ stocks.

Crucial economic indicators point towards a deep slump in India’s economy. In September, domestic core sector output contracted 5.2, the worst show in 14 years. All components—mining, manufacturing, electricity—of industrial production declined as factory output contracted 4.3%, the lowest in seven years. There are reports of an unpublished government survey indicating a steep decline in consumer spending for the first time in over 40 years. Liquidity concerns continue to haunt the NBFC, real estate and auto sectors.

“We see two risks to the market’s rich valuations—(1) convergence between a weak economy and a rich market; the high current valuations of the market would suggest that the Street is factoring in a swift recovery in the economy and (2) convergence between the ‘quality’ and ‘value’ stocks. We can only hope that the convergence is on a favourable basis with (1) revival in the economy and (2) re-rating in multiples of ‘value’ stocks,” notes Prasad.

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