A sharper-than-expected rebound in economic growth should underpin Indian shares when trading resumes on Monday, and extend an eight-month rally to record peaks into September. Rising foreign interest in Asia’s third-largest economy should also get a boost in the coming week when Japan inks deals to build large infrastructure projects, including help kick-off bullet trains, in India.

The government said on Friday, a festival holiday for markets, GDP grew at an annual rate of 5.7 per cent in April-June, the fastest pace in more than two years and ahead of street estimates of around 5.5 per cent. The rise, compared with 4.6 per cent expansion in the March quarter, reinforces expectations for a strong recovery, fuelled by robust mandate for the business-friendly administration of Prime Minister Narendra Modi.

Finance and insurance surged 10.4 per cent in the quarter, while electricity and gas output rose 10.2 per cent. Manufacturing nudged up 3.5 per cent, farm output climbed 3.8 per cent and mining expanded 2.1 per cent.

The pick-up was also facilitated by a series of measures undertaken by the earlier government towards the fag end of its 10-year term that ended in May. Doubtlessly, the nearly $2 trillion economy (Dh7.3 trillion) is on a firm growth trajectory, and this should show up on corporate earnings in the coming months.

Sales of passenger vehicles in July climbed 6.5 per cent from a year earlier, climbing for a third month after registering their first annual drop in 10 years in the financial year that ended in March. A private measure of manufacturing activity in July showed the best reading in 17 months.

Investors, led by large foreign funds, have been trying to get ahead of the curve, ploughing billions of dollars into stocks and bonds in India. Inflows so far this year exceed $30 billion, with equities receiving $13 billion, and the demand is spilling on to mid-cap and small-cap stocks, triggering a surge in broader indices.

Not expensive yet

The BSE-100 index has returned 27 per cent in year-to-date, well ahead of MSCI Emerging Markets at 6 per cent and MSCI World at 2 per cent, Barclays Capital said in a report dated August 28.

“Despite this strong run, markets do not appear expensive yet with the one-year forward valuation ratios for the BSE-100 Index at or near its 10-year average level. Further, comparing Indian equities to global equities, we find that the Indian equities valuation premium (P/E) over global equities is only 10 per cent currently, which compares to the last 10-year average of 14 per cent,” it said.

The blue-chip index, the top-30 Sensex, hit a record high of 26,674.38 on Thursday before closing at 26,638.11, gaining 2.9 per cent in August. It was the eighth successive monthly gain — the longest winning streak in more than 7-1/2 years.

The 50-share Nifty rose 3 per cent in August to close at 7,954.35, after scaling a new high of 7,968.25 on Monday. In comparison, the MSCI Asia Pacific Index fell, posting its first monthly decline since April.

One reason why brokerages believe the market is not overpriced is because they expect earnings upgrades to gather momentum as the economy picks up steam.

Barclays said there were early signs of improvement on this front, quoting Bloomberg consensus forecasts for the Nifty EPS growth of 16 per cent in 2014-15 and 17 per cent in 2015-16, compared with an insipid 9 per cent in 2013-14.

“While we believe that markets could time correct in short term, positive earnings momentum and strengthening economic data, gives us comfort on the medium-term uptrend,” the British investment house said.

As business confidence improves, companies would also renew investments, enabling speedier growth.

“As returns on investment improve, the corporate sector will be incentivized to lift capex,” economists at Morgan Stanley wrote in a report, and forecast the annual pace of GDP growth to reach 6.8 per cent in the coming March quarter.

Autos lead

Among the top gainers in Sensex stocks in August were automobiles, suggesting investors were piling into the sector that had been under pressure for a long time. The BSE-Auto Index rallied 11.6 per cent in the month, taking the rise since the start of January to 41.1 per cent.

Tata Motors led the field, rising 17.3 per cent in August, as its UK-based Jaguar and Land Rover brands helped triple its June quarter profit. The company also launched a new sedan, Zest, aiming to claw back its market share in the domestic market.

Utility vehicle and tractor maker Mahindra & Mahindra gained nearly 17 per cent, taking the rise close to 50 per cent this year, as investors bet on stronger earnings growth in the next financial year. Profit growth in 2014-15 is expected to be muted for the company, with June quarter earnings dropping six per cent.

Maruti Suzuki, the country’s largest car producer, rallied 10.3 per cent as it improves its dominant market share. The company, which is also launching new models, aims to post double-digit sales growth for 2014-15.

On Thursday, the Maharashtra government said Tata Motors and Mahindra would each invest Rs40 billion to expand their capacities in the state, while motorcycle and scooter maker Bajaj Auto would spend Rs20 billion and German car maker Volkswagen aims to pump Rs15 billion to raise their output.

Eyes on Japan

Stocks investors will keep close watch on Prime Minister Modi’s visit to Japan, amid expectations for an increase in Japanese investments and funding.

Modi, who flew to Tokyo on Saturday in his first visit to a major country since assuming office three months ago, aims to woo Japan to help his pet scheme to launch ultra-fast trains across India. The government has opened up the rail sector to foreign direct investment and Japan would be one of the first to grab the opportunity.

He is also scheduled to upgrade defence ties, including accelerating the purchase of an amphibious aircraft for the Indian navy. Also on the anvil is a likely civil nuclear energy pact that would pave the way for Japanese nuclear technology firms like Toshiba Corp and Hitachi Ltd to feed India’s voracious appetite for energy.

 

The writer is a journalist based in India