Robust foreign appetite for Indian assets, which has spurred stocks to record highs for three consecutive weeks, is set to build up steam after domestic inflation eased to multi-year lows and strengthened the case for a reduction in interest rates.
Data from regulatory authorities showed foreigners bought Indian shares worth nearly $15.2 billion in the year-to-date, boosting their cumulative holdings to a record $325 billion. Notably, the inflow into debt securities such as government and corporate bonds this year has been far more at over $23 billion.
“The money is now gushing in,” Aditya Narain and Jitender Tokas, analysts at Citigroup, said in a November 12 report on equity strategy. “The India flow tide has turned decisively: it’s high, rising and could well have a long way to go.”
The top-30 Sensex, the barometer that is closely followed by money managers, shot to an all-time high of 28,126.48 on Wednesday and closed the week at 28,046.66, up 0.6 per cent on the week and stretching gains for the year so far to 32.5 per cent.
Far from being restricted to blue-chip stocks, the rally is broad-based — and with greater intensity.
The BSE small-cap index has soared 70 per cent and the mid-cap index has leapt 50 per cent in the year-to-date, indicating that investors, both foreign and domestic funds, are staunchly bullish on the outlook.
Broad-based rally
Some of the stocks with large foreign shareholding are lenders Housing Development Finance Corp, ICICI Bank, HDFC Bank, Axis Bank, IndusInd Bank and Shriram Transport Finance Co, software services firm Infosys Ltd, drug maker Dr. Reddy’s Labs and media firm Zee Entertainment.
“Rising and widening flows suggest investors are not taking chances — they are investing, not waiting to invest,” the Citigroup analysts wrote. “While we do believe there will be small swells and ebbs, the inflow tide should stay strong for a while.”
They maintained their Sensex target of 31,000 by December 2015 and 9,240 for the Nifty.
The 50-share Nifty also hit a record high this week, climbing to 8,415.05 and closed at 8,389.90, up 0.6 per cent on the week. The index has risen 33 per cent in 2014.
“We remain bullish on Indian equities for 2015,” UBS strategists Gautam Chhaochharia and Sanjena Dadawala said in a note to their clients. “The economic growth recovery underway will likely sustain current valuations, especially as it starts manifesting in both macro and micro data points.”
The investment bank expects the Nifty to reach 9,600 by December 2015, based on one-year forward price-to-earnings multiple of 16 times.
“Our most preferred stocks are Asian Paints, Bharti Airtel, HDFC Bank, ICICI Bank, LIC Housing Finance, Maruti, Multi-Commodity Exchange, ONGC, Power Grid and Reliance Industries,” the UBS analysts wrote. “In the mid-cap space, we also like Bajaj Electricals, Britannia Industries, Exide Industries and Voltas.”
“Our least preferred stocks are Adani Power, Cipla, Hero MotoCorp, Hindustan Unilever, Infosys, Jubilant FoodWorks and United Spirits.”
Domestic funds, which had been net sellers for the past two years or so, have turned buyers ploughing in more than $6 billion over the past six months. The re-emergence of retail investors should underpin the bull market, and act as a counter balance to any outflow when the US raises interest rates next year.
Inflation eases
The wholesale price index rose by a lower-than-expected 1.77 per cent in October, government data released on Friday showed. It was the smallest rise in more than five years. The data followed consumer price inflation eased to 5.52 per cent, the lowest since the new series was launched on the back of a drop in food and fuel prices. It also came in below the central bank’s target of 6 per cent by January 2016.
Falling prices have raised expectations among investors that the central bank would be under greater pressure to lower interest rates and help bolster growth — which is also been pushed by the political leadership in New Delhi and the business community.
The Reserve Bank of India is scheduled to review policy on December 2 against a background of sluggish industrial output — which at 2.5 per cent in September was the highest in three months but well below potential. However, it remains to be seen whether these factors would impress Governor Raghuram Rajan, a former IMF chief economist, who brushed aside calls from within for a cut in September.
“The lower than expected CPI print and continued weakness in oil prices, increases the probability that the RBI may start giving a larger weight to growth concerns rather than a single-minded focus on inflation,” Goldman Sachs said. “However, we continue to expect the RBI to remain on hold in the December policy meeting.”
Most economists believe the conservative RBI would start lowering rates only in 2015, until more evidence that the easing pricing pressure was here to stay. UBS, for instance, expects the policy rate to drop by up to 200 basis points in less than two years.
Meanwhile state-run banks and private-sector Axis Bank have cut deposit rates by 15-50 basis points over the past three months, and the 10-year government bond yield has dropped over 35 basis points in about six weeks indicating the changing market trend. Demand for loans has remained sluggish because of resistance to high rates.
Banks are also under pressure from sticky loans, the result of a three-year slump in growth that left companies with inventory pile-up and excess capacities. Government-controlled State Bank of India, which accounts for a quarter of all banking business in the country, raised its provisions for bad loans in the September quarter by 52 per cent.
“I don’t believe that we will really see anything very sharp because this downturn has been very deep,” said Arundhati Bhattacharya, chairwoman of the bank, referring to asset quality improvement. “Once we see the demand cycle coming back, definitely we can begin to see things happening at a faster pace.”
Still, the bank reported a 30.5 per cent rise quarterly profit and its shares climbed 2.5 per cent on Friday.
The writer is a journalist based in India
