The swashbuckling rally in Indian shares has sturdy legs despite the emergence of resistance after a series of record highs, and the studied opinion of market pundits is for investors to plug into sectors such as cyclical stocks that have been laggards but whose prospects could get a shot in the arm when the investment climate improves.
The wait for this to happen will likely come in May if general elections, as widely expected, result in a change of guard in New Delhi and provide a thrust to get long-stalled projects back on rail and reverse an economic slowdown that has blighted the ruling Congress-led coalition for the past few years.
This belief has been drawing an expanding crowd of large foreign funds, spurred also in no mean measure by the diminishing prospects for the country’s northern neighbour and economic powerhouse, China. Official data shows foreign funds pumped $3.6 billion (Dh13.2 billion) into shares and bonds so far this month.
In a way, India’s remarkable resilience to buck the US tapering effect and domestic indicators showing the tide was turning favourable, have also underpinned the resurgence in the stock market. If the elections produce a decisive mandate, the country would be in for a strong economic rebound, showering investors with handsome returns.
“We upgrade India to overweight and raise Indonesia to market weight,” Goldman Sachs said in a mid-March report, clubbing the two emerging economies as benefitting from reduced external vulnerability and improving domestic fundamentals. “Corporate earnings downgrades seem to have bottomed out, with more signs of improvement in the investment cycle.”
It set a 12-month target for the Nifty at 7,600, implying a 17 per cent gain. The 50-share index closed at 6,493.2 on Friday, off an all-time high of 6,574.94 reached on Tuesday. The benchmark eased 0.2 per cent on the week as investors locked in profits, but the index is up 6 per cent in the past one month.
Profit-taking also clipped the top-30 Sensex after it hit a record 22,040.72 on Tuesday and the benchmark closed at 21,753.75 on Friday, down 0.3 per cent on the week. Analysts expect both the indices to resume their uptrend in the coming week on foreign demand, but there will be caution ahead of the central bank’s monetary policy on April 1.
“We remain bullish,” said Antique Stock Broking Limited. “We expect Sensex to grow by 18 per cent and 16 per cent in fiscal year 2015 and fiscal year 2016, respectively, and set a Sensex target at 24,295, based on 14 times fiscal year 2016 estimated earnings.”
Stock indices have surged to a series of record peaks in the lead-up to national polls that are spread over April and early May. Although the rally has met with resistance as the 14-day RSI (Relative Strength Index) indicated an overbought market, there is still much steam to power stocks further afield.
Doubtlessly, the single biggest contributor to the bullishness is the emergence of Narendra Modi, a charismatic but controversial leader with a pro-business reputation as the frontrunner to become the next prime minister. Opinion polls have consistently showed his Bharatiya Janata Party-led National Democratic Alliance (NDA) is likely to get the most number of parliamentary seats albeit short of a majority.
“Modi is obviously a very big influence on the stock markets. I suspect that as the election draws nearer, the markets will actually run up a bit further,” Geoff Lewis, global markets strategist at JPMorgan asset management, told ET Now television channel.
“Clearly, investors are really hoping that there will be change in the government in India and a more business-friendly and reform-minded administration, led by the BJP, will come to power. That would be a dream outcome for both domestic and foreign investors. Whether that actually materialises, we will have to see. I still think there is quite a bit of risk there.”
He was not the only one to speak his mind about the ground realities in India, the potential for the economy, markets and investors.
“The market view is that if Modi gets in, it will be a game-changer,” Adam Gilmour, head of Asia-Pacific currency and derivatives sales at Citigroup, told Bloomberg. “We always take politics with a pinch of salt, with the rare exceptions like India, where it’s going to really make a difference.”
Weak political leadership has been at the root of India’s problems, more than halving economic growth to 4.5 per cent in 2012-13 from more than 9 per cent until 3-4 years earlier. Growth in the current financial year that ends on March 31 is also expected to remain under 5 per cent, with the manufacturing sector in disarray.
Nowhere is this pertinent than in the energy sector. India is home to one of the world’s biggest coal reserves, yet the country is forced to depend on costly imports of the crucial raw material because political corruption in the allocation of coal fields halted domestic output. This has had a domino effect — ballooning costs for producers and severe shortfalls in electricity generation.
“What everyone’s worried about is a quagmire of indecision,” Gilmour told the wire agency. “A lot of hard decisions need to be made in India to fix it.”
Gilmour, a two-decade veteran at Citigroup, believes a clear mandate for Modi could act as a catalyst for the rupee to strengthen towards 40 to 45 against the US dollar. Bucking losses in other emerging currencies, the rupee firmed 0.5 per cent this week to 60.895 on the back of rising foreign portfolio inflows.
However, if the elections throw up a fractured mandate and lead to a weak coalition the rupee could tumble beyond the record low of 68.845 struck last August, he said.
Long discarded cyclical stocks should be good pickings for investors looking to expand their exposure to a region with immense potential. Shares in smokestack industries from cement to steel and automobiles have all languished because of the slowdown.
“Headline valuations have recently expanded but cyclical sectors remain inexpensive compared to history and are relatively under-owned,” Goldman Sachs said.
It also recommended state-controlled Oil and Natural Gas Corp, Coal India, NTPC and Bharat Petroleum as key election beneficiaries.
Among the private-sector, the US investment bank said it favoured ICICI Bank, Larsen & Toubro, UltraTech Cement, JSW Steel, IndusInd Bank and Voltas.
“Our analysis of past election moves, valuation and flows suggests India may have more room for a pre-election rally than Indonesia,” it added.
The writer is a journalist based in India