Share prices in India rebounded strongly from an early slide this week, underscoring the market’s resilience in the face of global headwinds triggered by the Russian rouble’s wobble and investor faith in New Delhi’s resolve to push ahead with reforms.

Even though the pace of tearing down barriers to investment is hobbled by fractious politics, the government won a breakthrough by presenting to parliament the Goods and Service Tax bill on Friday after reaching consensus with opposition-ruled states. The legislation, which will replace multiple central and state levies, is expected to provide a thrust to economic growth.

As the current winter session of parliament, which ends on Tuesday, has been stalled from doing any productive business, the Bharatiya Janata Party (BJP)-led administration is expected to pursue executive action to raise the foreign shareholding limit in insurance to 49 per cent from 26 per cent as also overhauling the coal sector. The two ordinances must be okayed by the president, and will then have to be approved by parliament in budget session that begins in February.

“The focus is less on India’s macroeconomic frailties and more on the extent to which the new administration will pass the reforms necessary to increase the GDP growth,” John-Paul Smith and Emad Mostaque at independent research firm Eclectic Strategy said in a report.

“Most overseas investors do appear to have bought into the idea that the new government does have a master plan to adhere to a gradualist reform timetable and not to introduce too many unpopular reforms before the BJP can take full control of the upper house of Parliament, the Rajya Sabha in the elections that are scheduled to take place in 2015.”

Fed patience

The US central bank’s remark that it would be “patient” about when to start raising interest rates also helped calm nerves about a possible slowdown in capital flows into emerging markets such as India, and played a crucial role to lift market sentiment after the Russian crisis threatened to unravel markets across countries.

Foreign portfolio funds have moved about $17 billion into Indian equities in the year-to-date, and there is a chance of the inflows further rising before the year ends as investors build positions in anticipation of gains in the coming year. The Federal Reserve’s statement, which effectively rules out any quick rate increases, would also underpin the market.

“Portfolio managers have added to their already-overweight positions in India, funding this increase through a reduction in both the Philippines and China,” Goldman Sachs said.

“These shifts have not really moved the needle,” it said. “Emerging market portfolio tilts at the market level appear strikingly similar compared with the end of 2013.”

Funds were still overweight the Philippines, Turkey, Thailand, and Indonesia. The largest underweights relative to the MSCI EM benchmark were Chile, Malaysia, Poland, Taiwan, Korea, and South Africa.

“This allocation suggests emerging market managers are comfortable with a pro-momentum orientation, as the most overweight markets are indeed those with the strongest returns in 2014.”

The top-30 Sensex and the 50-share Nifty ended the week barely higher at 27,371.84 and 8,225.20 respectively, snapping two weekly declines. Activity is expected to be volatile in the coming week because of the expiry of monthly derivatives contracts, and fund managers would be looking to bump up their net asset values at the year-end.

“We are reasonably constructive on the Indian markets,” Sridhar Sivaram, managing director at Morgan Stanley Investment Management, told Bloomberg TV, adding that he expected 15 to 20 per cent returns from the markets next year. “All the building blocks for an economic recovery are very much in place.”

Arvind Subramanian, a former US-based economist who was appointed India’s chief economic adviser in October, said on Friday that the government would have to step up public spending to bolster sagging growth in the medium term as private sector investment was not picking up.

The official is in the midst of helping Finance Minister Arun Jaitley with the annual budget that will be presented to parliament in February.

Financials beckon

A pullback in financial stocks, mainly caused by external market contagion and profit-taking after a big rally, should be seen as an “entry opportunity” because of improving prospects, according to JP Morgan.

“Despite the stutter in the markets, fundamentals continue to firm up,” analysts Seshadri Sen and Dhiren C Shah at the investment bank said in a note. “The reform process continues apace — the bipartisan support for the insurance bill is a key positive for the sector. Also, the RBI’s relaxation of guidelines on restructuring infra loans is a major positive — we think it could speed up the turnaround in asset quality for the sector, expected in 2015-16.”

They said US investors were upbeat about the sector. “While Axis and ICICI were the favourites, we saw more interest in PSU (public sector undertaking) names than we have in the last three to four years — not just in SBI, but even in the smaller, cheaper stocks.”

“Among mid-cap banks, Yes [Bank] attracted significant interest; on the other hand, there very few enquiries about NBFCs [non-banking financial companies].”

R Sreesankar at brokerage Prabhudas Lilladher Pvt Ltd was also bullish on financials, among other sectors.

“Our preferred picks are HDFC Bank, SBI, and ICICI Bank among the financials; L&T and Ashoka Buildcon among engineering and capital goods; and Infosys, TCS, MindTree, Tech Mahindra and KPIT Technologies among information technology.”

He also picked cement makers ACC and JK Lakshmi Cement and automobile firms Maruti Suzuki and Tata Motors among potential winners.

“While we continue to like the FMCG [fast moving consumer goods] sector from a margin expansion and earnings growth perspective, the steep valuations in the sector forces us to maintain Neutral on the sector.”

 

The writer is a journalist based in India.