MacroScope

India share bulls running mainly on hope, well ahead of peers

June 3, 2014

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Indian stocks have rallied sharply over the last two months, soaring to record highs, although the bull run that began with expectations that Narendra Modi will become the country’s next Prime Minister may soon run out of road.

India’s top equity index, the BSE Sensex, was trading over 24,850 on Tuesday, having shot up over 10 percent since mid-April alone, when polling began, despite economic growth languishing below 5 percent, along with high inflation and interest rates.

With growth at just 4.7 percent, only a marginal improvement from the 10 year low plumbed in the previous financial year, the market could struggle in coming months, especially if the economic data continue to disappoint.

“It’s more about perception now,” said Neeraj Dewan, Director at Quantum Securities. “If you look at earnings, you would sell half the stocks.”

The rally undoubtedly started from anticipation that Modi would lead his Bharatiya Janata Party (BJP) to victory in the Indian general election, and possibly with a majority government.

That is exactly what he did, forming the first majority government in three decades in a nation that has been consistently plagued by federal government inertia, squabbling between coalition partners and pandering to local interests.

But it will take a long time to see the results.

“Markets have over-run,” said Shrikanth Subbarayan, CEO of Way2Wealth. Even if the new Indian government starts out with a string of reforms, expected disappointing company earnings in June and the enormity of the challenge facing the government will lead to more disappointment, he says.

And disappointment is more in line with what India’s peers in emerging economies are feeling right now.

Brazil’s Bovespa is up just under 2 percent this year, and 30 percent off the record closing high, just as it’s about to host the World Cup. The economy there barely grew in the first quarter.

China’s stock market is also going nowhere. It’s over 40 percent off its peak, with many investors now fretting about an overextended property market that could cause trouble for the global economy.

Russia’s stock market is still smarting from the beating it took in March over the Ukraine crisis as investors have fled the country.

Back to Mumbai.

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Most stock market analysts, who aren’t in the slightest bit shy about submitting extremely bullish forecasts, did not expect a rally of this scale, according to a survey conducted by Reuters just two months before the vote.

The consensus in the poll was for the Sensex to hit 23,000 by June, when it was trading at around 21,800 in mid-March. Barring a significant market correction, that forecast will likely prove to have been not ambitious enough.

Vaibhav Agrawal, an analyst at Angel Broking, who held that consensus view, has raised his year-end forecast by 2,000 points to 26,500, about 10 percent above where it is now. Another expects it to rally to 27,000 by year-end.

But others, like Subbarayan, who have based their view on more than just sentiment current, are not.

“The other big thing that could weigh in on what the government can do is the El Niño factor. Agriculture and rural industries trigger a lot of other industries, impacting growth by 1-1.5 percent,” he said.

El Niño, the weather phenomenon, could delay the monsoon season affecting agriculture and food prices in India and turn into a headache for the Reserve Bank of India.

“The impact on inflation will tie the RBI’s hands over the rate regime, and unless the interest rate regime starts reversing in this country, the investment climate will not change,” Subbarayan said.

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