Bombay Stock Exchange in Mumbai (BSE)
A bronze bull statue at the entrance to the Bombay Stock Exchange in Mumbai. Image Credit: Bloomberg

Dubai: While pundits argue whether Indian Prime Minister Narendra Modi would retain his chair, market watchers say the current rally in Indian equity markets looks unstoppable.

Historically, Indian markets have hardly shown any correlation with a government’s popularity and the returns over its tenure. The BSE Sensex gained 162 per cent between 1991-96, when P.V. Narashima Rao was prime minister, who was at the head of a weak coalition. The second biggest returns of 131 per cent came during the first UPA tenure under Manmohan Singh, who headed a weak coalition that was sustained by outside support.

The Sensex gained 45 per cent during Modi’s stewardship, who won with an absolute majority. The bull run, that is underway, in Indian equities started in 2009 soon after the global recession, but the actual breakout took place in 2014, when Modi assumed office. Going forward, there are plenty of factors that may work in favour of Indian equities irrespective of the government that comes to power.

Optimism around a stable government post the general elections and a strengthening rupee are positively influencing domestic markets.

- Anand Radhakrishnan, Managing Director & Chief Investment Officer — Emerging Markets Equity at Franklin Templeton — India

“Optimism around a stable government post the general elections and a strengthening rupee against the dollar are positively influencing domestic markets. Domestic investment indicators show a positive trend,” Anand Radhakrishnan, Managing Director & Chief Investment Officer — Emerging Markets Equity at Franklin Templeton — India told Gulf News.

The Nifty index has gained 40 per cent since May 2014, while the benchmark Sensex has nearly doubled and closing in on the keenly watched 40,000 mark.

Rashmi Sadhwani, senior vice-president at UTI International, said: “When it comes to India’s equity market, it was the earning growth that has started to pick up. Hence, with earnings rising and prices staying afloat, the overall PE ratio actually fell making Indian equities not only cheaper versus its own history, but more compelling versus other EMs because of upward earnings revisions.”

40%


Gains in India’s Nifty since May 2014, when Modi won

Technical analysts see a near 50 per cent upside in the equity benchmark. “Indian equities may continue its bull run which may extend in coming years. The Nifty index has been making new highs and may breach 14,200/15,000 by the second quarter in 2020,” said a technical analyst who did not wished to be named.

The economy is on a firm footing. India’s real GDP growth is estimated at 7.2 per cent in fiscal 2018-19, according to the World Bank, with inflation under control. Global factors such as a dovish stance from the Federal Reserve could also come to aid Indian equities amid record inflow from foreign investors, who have been pouring the most into Indian equities compared to other regional markets.

“The foreign portfolio investor situation is reversing in 2019 with the changed policy stance of the Federal Reserve,” said Radhakrishnan. “Fears of a global liquidity crunch stand alleviated as the US central bank has paused further rate hikes in 2019 in view of moderation in economic growth.”

With earnings rising and prices staying afloat, the overall PE ratio actually fell making Indian equities not only cheaper versus its own history, but more compelling.

- Rashmi Sadhwani, Senior vice-president at UTI International

In March, Indian stock markets received $4.89 billion, the highest since February 2012. FDI flow into Indian markets turned positive in the first quarter of 2019 to the tune of $8.2 billion compared to $4.5 billion worth of outflows during the whole of 2018, according to data from Franklin Templeton.

A careful analysis of the breakdown of the rally would suggest that large caps are expensive, and mid-caps have lagged in performance after overvaluation in 2018.

“The under-performance of madcaps from the end of 2017 was brought about by its overvaluation vis-a-vis large caps,” said Radhakrishnan. “The correction over the past year in the midcap segment has moderated the premium commanded by the midcap index over large cap. The risk of overvaluation in madcaps has largely been corrected.”