Nifty gains make India the best performer in 2012

18 FEB, 2012, 01.25PM IST, RAJESH MASCARENHAS,ET BUREAU 

MUMBAI: Foreign portfolio managers and local punters are betting on a rate cut, easy money, UP elections, cut in subsidy and a gradual shift in global liquidity from commodities to equities to buy stocks. Even though corporate profit growth is at its lowest and industrial output grew just 1.8% in December 2011 against 8.1% a year ago, Nifty has emerged as the best-performing index in the world since Januray 1. 

Nifty has gained 940 points, or 20.33%, while Sensexrose more than 18% in the first 35 trading sessions of the current year to close at 5564 and 18289 on Friday. The bellwether indices were down 25% in 2011. 

Are we getting into a situation where excess liquidity is being created amid positive cues in the eurozone, or is it because short sellers are rushing to cover large positions? 

"It is a combination of factors such as strong liquidity, improved macroeconomic fundamentals and return of risk capital which has been driving the current stock market rally. The reasons why these factors are now turning out to be more realistic are declining inflation numbers, peaking interest rate, positive expectations about the budget and elections on the domestic front," says Devesh Kumar, managing director & head of equities, RBS Global Banking and Markets. 

Fund managers are latching on to news clips and sound bytes - like the FM's statement that he was losing sleep over the rising subsidy bill - to ride the momentum. A robust FII inflow of $4.9 billion in the past 45 days - the highest ever figure recorded for that period - is driving the rally. Data suggest that this is the fastest ever rally in Indian equities. 
In 2010, FIIs had pumped in over $29 billion in Indian stocks, resulting in a 3044-point rally in the Sensex. This year the Sensex has gained over 2800 points so far. But while FIIs invested $4.4 billion, domestic mutual funds and other institutional investors have been net sellers for Rs 3,000 crore and Rs 11,000 crore, respectively. 

A loose monetary policy of ECB and Fed has created surplus liquidity which is boiling over into emerging markets. Also, the muted growth in global commodity markets prompted fund managers to shift their focus from commodities to equities, which were beaten down badly last year. The US gold price declined 4% in the past six months while the DJ-UBS Commodity index plunged over 5% during the same period.