Indian stocks inspire confidence

Mumbai: Momentum is with Indian shares to extend their rally to an eighth consecutive week for the first time in a year and a half amid heightened interest from foreign investors anticipating a stock market rebound.

Over the past month, JP Morgan raised its earnings estimates for companies on the MSCI India Index by 1.4 per cent this year and 2.6 per cent next year.

The upgrades were the first after more than a year of downward revisions and indicated that the stock market was probably on a strong rebound.

"In past cycles, equity markets typically bottomed out about a couple of months before the final trough in consensus earnings estimates," analysts led by Bharat Iyer at the US brokerage wrote in a note.

"If the recent upgrades are sustained, we may have put the lows of the current bear market behind us."

The top-30 Sensex has leapt 41 per cent over the past seven weeks since hitting a 2009 trough in early March, and wound up last week at 11,329.05 - its highest close in six months.

Technical analyst Kanu Dave said the widely tracked index was poised to gain momentum in the coming weeks after it closed above its 200-day moving average for the first time in over a year on Friday.

"It's a strong signal suggesting the rally has got legs," he said.

"The Sensex took the better part of a week to break through the resistance which is also a good sign."

The index had breached the 200-day moving average the previous week also, but it could not close above the level.

The surge was helped by foreign buying of over $1 billion (Dh3.67 billion) so far in April and there is optimism the inflow would pick up on the back of improving corporate earnings outlook.

JP Morgan said India's factory output would have reached a trough in March and profit estimates may be raised further once industrial production stops declining.

It also noted that forecasts fell 33 per cent in the bear market, more than the 31 per cent average in previous cycles.

The Sensex had plunged more than half in 2008 as the global economic downturn hit domestic business much harder than expected. However, the market rally over the past few weeks was unusually strong for a bear-market rally, the US brokerage said.

Among the upgrades in earnings estimates over the past month were Cairn India Ltd, a unit of UK-based Cairn Energy Plc, which started operations on its expansive oil fields in Rajasthan, and construction firm Jaiprakash Associates Ltd.

The month-long general elections that end on May 13 are a political risk for the market, but analysts are betting that, even if the mandate is fractious, a workable coalition will provide stability.

"Over the last 20 years, we've been through governments of every colour," the Reserve Bank of India's deputy governor, Rakesh Mohan, told a gathering after a conference in the London Business School last week.

"And this has been the period of the highest growth the country has had since independence. Whatever the consequence of the elections, one would expect the continuation of the kind of growth we've had," he said.

Goldman Sachs said if a stable government were to come to power, markets would be driven by fundamentals and global cues.

"In that event, leading indicators suggest to us a recovery in economic activity in the second half of fiscal-year 2010," it said in a note.

The Reserve Bank of India (RBI) cut its main short-term lending rate by a quarter point last week to 4.75 per cent to bolster growth as inflation hovered near zero.

It was the sixth reduction since mid-October and took the total cut to 475 basis points.

The central bank's borrowing rate was also lowered by 0.25 percentage point to 3.25 per cent, to discourage commercial banks from parking surplus cash with the RBI.

The moves are expected to bring down borrowing costs for consumers and companies, although banks are reluctant to immediately follow suit as their deposit costs are still high.

However, the government's stimulus packages to boost spending are starting to kick in, with sales of cars and motorcycles showing an upward trajectory in the March quarter.

"The various monetary and liquidity measures, taken together, have released actual/potential liquidity amounting to over Rs4.2 trillion (Dh309.7 billion) since mid-September 2008 (about seven per cent of GDP)," RBI's Mohan said.

- The writer is a journalist based in India.