Sensex Hits 32,500 in Morning Trade; HCL Technologies Surges 3.6%

Thu, 27 Jul 09:30 am

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Asian equity markets are mixed today. The Nikkei 225 is up 0.22%, while the Hang Seng is up 0.37%. The Shanghai Composite is trading lower by 0.35%. US markets ended at fresh closing high in overnight trade after the US Fed kept interest rates unchanged and strong earnings reports from Boeing and AT&T.

Back home, share markets in India have opened the day on a firm note. The BSE Sensex is trading higher by 132 points while the NSE Nifty is trading higher by 44 points. The BSE Mid Cap Index opened up by 0.5%, while BSE Small Cap index opened the day up by 0.4%.

All sectoral indices have opened the day in the green with realty stocks and bank stocks leading the gainers. The rupee is trading at 64.42 to the US$.

The markets are touching record highs every day. It makes sense to sit back and evaluate if the fundamentals are in place for such heady growth. When one looks at corporate earnings over the past 5 years, it paints a different picture.

Earnings Yet to Catch Up with Valuations

While valuation has reached dizzy heights, earnings are yet to catch up. Investors are hoping that earnings will eventually catch up with valuations. Even the slowdown in the economy due to the notebandi impact has been ignored.

With money from retail investors coming into the market at a steady pace, the general assumption amongst investors is that growth will eventually come and justify the premium valuations they've given to the markets. Perhaps investors are getting ahead of themselves.

Information technology stocks opened the day on a mixed note with Moser Baer and HCL Technologies leading the gains. In the latest development, HCL Technologies reported a 10.7% sequential fall in net profit at Rs 22.1 billion for the June quarter.

Revenue for the quarter rose 0.8% QoQ to Rs 121.5 billion, the reports noted. This was 7.2% higher than the previous quarter on YoY basis.

The IT major expects FY18 revenue for the company to grow by 10.5-12.5% in constant currency terms.

Further, the company has successfully concluded its buyback programme within the quarter. The buyback entailed 35 million equity shares at a price of Rs 1,000 per share.

HCL Technologies share price surged 3.6% in the opening trade.

In another development, the US Federal Reserve kept its benchmark interest rate unchanged at a time of low inflation, which remains persistently below the Fed's target level.

The Fed noted Wednesday in a statement that inflation has stayed undesirably low, even though the job market keeps strengthening, with the unemployment rate just 4.4%.

Normally, solid job growth drives up wages and prices. But the Fed's preferred gauge of inflation has moved further below its 2% target in recent months.

The central bank decided after ending its latest policy meeting to leave its key rate unchanged in a range of 1% to 1.25% after having raised rates twice this year in March and June.

With the US economy chugging along for many months, the Fed has been gradually easing off the stimulus it provides to the economy by raising interest rates to more normal levels.

Yet so far the cost of lending has been slow to respond to the interest rate increases. But as the Fed continues with this policy, consumers who borrow to buy houses, cars, refrigerators and other items will have to pay more for those goods, the reports noted.

But, why should we in India be worried about which way the American economy and interest rates are headed? As Vivek writes in The Vivek Kaul Letter:

• "The answer is simple. The United States still forms around one-fourth of the global gross domestic product(GDP). It remains the largest consumer in the world. And any global recovery isn't going to happen, without the American economy finding its way back to where it was during its heydays or somewhere close to it."

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