Strong earnings indicate bulls likely to reign

Mumbai: With cash-flush foreign mutual funds chasing potentially better returns for their investments, Indian shares have jumped to the forefront from being the world's laggards until about two months ago.

Dalal Street is unlikely to let go of the glory anytime soon although there could be some intermittent profit-taking. Earnings results from companies indicate they are doing better than expected by analysts, or the worst was behind them.

Tata Motors, whose products include heavy trucks to the world's cheapest car — the Nano — posted a spectacular 40.5 per cent jump in December-quarter profit thanks to its high-margin UK-based marquee brands Jaguar and Land Rover.

The company reported a 44 per cent rise in January sales volumes for the Jaguar and Land Rover, demand for which is driven by China. Its total vehicle sales grew 21 per cent last month, indicating a growth rate that is well ahead of the industry. "There has been a tidal wave of foreign fund investments seeking bargains," said equity strategist V. Venugopal. "The inflows are directly linked to a jump in global liquidity. We should see a series of earnings upgrades and this should draw in more funds."

A stronger US economy is putting more money in the hands of investors, while a lifeline thrown by European monetary authorities to rescue their banking systems has also boosted cash flows to emerging markets.

Overweight

Forty-four per cent of fund managers polled by the Bank of America Merrill Lynch said they were overweight on emerging market equities, compared with 20 per cent in a similar survey a month ago.

The top-30 Sensex has surged almost 20 per cent in 2012. The rise was singularly powered by net inflows of nearly $5 billion (Dh18.3 billion) from foreign funds in the same period.

The index has notched weekly gains for seven times in a row, the longest winning streak in nearly two years. The benchmark climbed to its highest close in over six months on Friday at 18,289.35 — with its 14-day relative strength index at 77, well above the 70 mark that indicates the market is overbought.

"You should expect a healthy correction at these levels," said Venugopal. "But the trajectory is very much on the upside."

Minutes released by the RBI on Friday showed four of the seven external members of the central bank's technical advisory committee had recommended for a cut in rates in January, but this was overruled by the Governor D. Subbarao.

Goldman Sachs expects the RBI will slash the benchmark repo rate by 150 basis points by December.

Another factor that underpins Indian shares is the longer term outlook for the country, home to more than 1.3 billion people and a resurgent domestic market that is the main driver for the economy.

Consumer spending in India is likely to almost quadruple by 2020 to $3.6 trillion, the Boston Consulting Group said. By 2020, India will constitute 5.8 per cent of global consumption.

The writer is a journalist based in India.