Indian shares to consolidate in short term

Mumbai: India's bubbling shares are set to consolidate in the short term as investors look to cash in some of the profits after a spectacular rally that saw the top-30 Sensex vault as much as 94 per cent in about three months,

However, cautious investors who failed to grab the opportunity during the ascent are firmly poised to scoop up shares when prices drop, signalling the market had strong legs. Cash-flush foreign portfolio managers lead the pack, drawn by signs of a pick-up in the economy.

"The Indian economy and the financial sector are returning to a potential growth path, post a period of adjustment to the intense dislocation in the global economic environment," Goldman Sachs analysts, led by Sampath Kumar, wrote in a note.

The US bank forecast net income growth for the financial services industry to soar to 32 per cent in 2010-2011, from one per cent in the year ending March 31, 2010. It upgraded government-controlled State Bank of India and Punjab National Bank to "buy," from "neutral" and "sell" respectively.

But private sector ICICI Bank and Housing Development Finance Corp were cut to "neutral" from "buy" because their valuations already factor in potential gains from an improving outlook for the economy and financial industry, it said.

The Sensex snapped a winning streak of 14 weekly gains last week and dropped 4.7 per cent to 14,521.89. The index had jumped 83 per cent during the run up since early March in its longest winning stretch in four years.

Heavy foreign buying of almost $8 billion (Dh29.4 billion) of stocks over three months was the main force behind the rally, which at its peak had lifted the index's rise to 94 per cent from the 2009 low in March.

The sharp rise has raised concerns about pricey valuation, with some market pundits pointing out they would need more economic data to justify the gains. Big bets have been placed on the annual budget, due on July 6, to set the tone for the market - with expectations ranging from asset sales in state companies to more liberal investment rules.

Prime Minister Manmohan Singh and some top advisers have said the government would aim to focus on growth to create more jobs; sell stakes in state firms to fund spending on infrastructure; and generally pursue reforms that were kept in abeyance during its previous five-year term due to opposition from its then communist allies.

With the left parties biting the dust in the April-May national elections, the coalition is now much stronger to implement its policies.

Still, the government has to deliver on its promises to further propel the market upwards, analysts said.

UBS said it was less bullish on Indian shares because further gains would be limited and as companies take advantage of the rally to sell stocks.

"Over the medium term, we believe fundamentals and liquidity are likely to support higher valuations," analysts Suresh Mahadevan and Navin Gupta wrote in a note to clients last week. "However, in the short term, given the sharp rally, we expect the market to consolidate."

The Swiss brokerage set a Sensex target of 16,750 by March 2010 and said it was increasing the cash component in its model India portfolio to five per cent and raising the weighting of "defensive" shares including healthcare and telecommunication companies.

It recommended investors put 1.5 per cent of their funds in pharmaceutical companies, after previously allocating a zero weighting. The brokerage raised its weighting for consumer staples shares to 7.5 per cent from 4.7 per cent.

UBS boosted technology services to "overweight" from "neutral," saying an economic recovery in the United States and Europe and a consolidation will drive further gains for outsourcers. The "underperformance" of telecommunications companies prompted the brokerage to upgrade the industry, the analysts said.

- The writer is a journalist based in India.