India’s record-breaking stocks rally should gain momentum over the medium term, supported by a drop in global oil prices and improving business confidence in the country’s economic outlook. Upbeat US and German data are seen as the icing on the cake as they bolster the prospects for export-led sectors such as software services.

While the sub-continent’s nearly $2 trillion economy (Dh7.34 trillion) is primarily driven by domestic demand, companies are increasingly tapping into the country’s cheaper labour force to cater to overseas markets. Automobile giants such as Ford Motor, Suzuki, Hyundai and Honda are either exporting cars from India or building hubs to feed markets abroad.

These efforts are set to get a big boost with Prime Minister Narendra Modi leading the charge to attract foreign direct investment, and make “Made in India” tag a global brand. “I am very confident that we will achieve growth of about 5.8 per cent this fiscal year,” Finance Secretary Arvind Mayaram told a business conference.

That is above the central bank’s conservative forecast of 5.5 per cent economic expansion for 2014-15, and quite a rebound from the below 5 per cent growth in the previous two financial years. The fall in world oil prices to below $100 a barrel should also provide a cushion to India, which relies on imports for about 80 per cent of its oil consumption.

The revival in the economic outlook has caught the eyes of global fund managers, eagerly hunting for better returns. A semi-annual investor survey conducted by Morgan Stanley found that most investors were more bullish on Indian equities as seen in their shifting portfolio strategies and positive stance on markets and macro.

Bullish fervour

“We see a slight shift in investor positioning from bottom-up stock picking to a more top-down bullish approach to equities. Forty per cent of the investors surveyed still pursue stock picking (down from 63 per cent in the previous survey) while the same percentage indicate it’s the start of a bull market,” analysts Sheela Rathi, Ridham Desai and Utkarsh Khandelwal said in report dated August 21.

“They like financials and dislike consumer staples — same as in the last survey.”

Sixty-five per cent of the participants held an overweight position on India, compared with 40 per cent in a February survey. About half of the investors expected India to outperform emerging market equities while 19 per cent expected underperformance.

Investors in the survey said they expected 2014-15 Sensex earnings to grow 15 per cent from a year earlier, ahead of Morgan Stanley’s forecast of 13.5 per cent rise.

“In terms of what will drive market performance over the next 12 months, about half of the investors surveyed seem to believe government policies will be key, while one-third of them expect earnings to drive performance. Interest rates and inflation matter to about 12 per cent of those surveyed while less than 10 per cent expect geopolitics or US yields to be the driving force,” the US investment bank said.

Overseas investors have bought shares worth nearly $13 billion since the start of January, and have ploughed $16.5 billion into debt securities, indicating the growing confidence in Indian assets.

Record highs

The buying, which picked up steam in recent days, drove the top-30 Sensex and the 50-share Nifty to a series of record highs this week.

The Sensex rallied as high as 26,530.67 before the closing the week at 26,419.55, up 1.2 per cent on the week. The Nifty ended up 1.6 per cent at 7,913.20, after hitting 7,929.05. The indices have gained nearly a quarter this year, and looks good to climb further as earnings outlook brightens.

“Our lead indicators are tracking June quarter [economic] growth at 6 per cent up from 4.6 per cent in March driven up by higher industrial growth,” DSP Merrill Lynch economists Indranil Sen Gupta and Abhishek Gupta said in a report.

“Incoming data support our standing call that growth will bottom out in 2014-15. We have upgraded 3 of our 10 lead indicators for the first time since April 2012 when they signalled bottoming out,” they wrote, raising loan demand to neutral from negative, hiking confidence to positive from neutral and upgrading industrial production to neutral from negative.

Brokerage CLSA, which is overweight on discretionary, financials, information technology, real estate and utility sectors, has recommended half a dozen stocks for top returns. The picks with their 12-month target prices are: Grasim Rs4,900 compared with Friday’s close of Rs3,438.80, State Bank of India Rs3,160 compared with Rs2,523,60, Maruti Suzuki Rs3,000 compared with Rs2,755.15, ICICI Bank Rs1,650 compared with Rs1,537.70, ONGC Rs530 compared with Rs426.85 and Bharti Airtel Rs413 compared with Rs.365.20.

Rupee strengthens

Rising foreign investment flows into India and a positive comment by rating agency Standard & Poor’s official lifted the rupee to its strongest level against the dollar in three weeks.

“If authorities can deliver on their fiscal goals resulting in a lower debt and interest burden that would benefit India’s credit fundamentals,” Agost Benard, S&P’s Singapore-based associate director of sovereign ratings, told Bloomberg, referring to Finance Minister Arun Jaitley’s aim to reduce fiscal deficit to 4.1 per cent of GDP in the current financial year, which would be the lowest since 2008.

“The fiscal policy stance has been a constraining factor for India’s sovereign ratings for some time,” he said, which market pundits interpreted as a subtle hint for a possible upgrade if underlying factors change for the better.

On Wednesday, for instance, foreigners bought Indian debt worth a record $2.65 billion, estimated to be the biggest one-day purchase.

The rupee closed at 60.465/475 per dollar on Friday, up 0.5 per cent on the week, after strengthening to as much as 60.375 at one stage. The currency can climb towards 58-59 but the central bank is expected to step in and buy dollars to bolster reserves and halt the rupee’s rise.

While a stronger rupee and subdued oil prices could trim India’s import bill and reduce deficits, excessive gains in the rupee can make Indian products uncompetitive and dent export prospects.

The writer is a journalist based in India