India’s top-30 Sensex notched its longest stretch of weekly gains in two-and-a-half years as new investors more than made up for some funds who took profits off the table. Rising optimism about foreign direct investment, after Japan and China committed to build projects worth $55 billion over five years, has provided fresh impetus to the bullish fervour.
The benchmark stock index, which is closely tracked by overseas investors who have pumped nearly $15 billion into domestic stocks so far this year, posted gains for six consecutive weeks, which is the best run since a seven-week rally until February 2012.
With the US Federal Reserve in no hurry to raise interest rates, until probably the third quarter of 2015, there is no immediate threat to foreign fund flows reversing from emerging markets. This should ensure sustained demand for Indian stocks, and further power the Sensex which has gained 28 per cent this year — making it the biggest gainer among emerging markets.
Betting on a longer-term bull market in India, global fund manager Templeton is eager to accumulate more stocks in its emerging market portfolio.
“India is the second largest of our holdings after China. Thailand is a pie in our Asian funds, but among our global funds, India is right up there along with Brazil,” Mark Mobius, executive chairman of Templeton EM Group, told ET Now television channel on Thursday. “Growth rates in emerging markets are very high (and they) justify valuations.”
Go for cyclicals
Cyclical stocks, which had been among the worst performers for more than two years until a slow rebound started a year ago, should offer good prospects on the back of a revival in consumer spending. A late flourish in monsoon rains after a poor start has doused fears of any big impact on farm output.
“It is time for the rotation into cyclicals to resume, after the reversal post-elections. We expect banks and cement to lead the trend, with capital goods and real estate being more back-ended,” analysts Rahul Singh and Saurav Anand at Standard Chartered Securities (India) Ltd said in a report.
While the potential for positive surprises in inflation from lower crude oil prices and improved rains, and gradual easing of systemic stress, should underpin banks, cement producers have started to see a recovery in demand and better prices, they wrote.
Their top picks among large-cap stocks were ACC, ICICI Bank, Bharat Petroleum Corp, Maruti Suzuki and HCL Technologies. Among mid-cap they preferred Voltas, Sobha Developers and PI Industries.
Mobius said he saw opportunities in small-cap stocks, and was bullish on oil and gas shares as well as banks. “Banks will benefit from economic recovery,” he said, adding that he owned many technology stocks in his portfolio such as Tata Consultancy Services.
More funds
State-controlled Life Insurance Corp of India has been the biggest domestic investor in stocks so far, but this could now be supplemented by the Employees’ Provident Fund Organisation (EPFO) if its investment committee approves a proposal to invest part of the $125 billion it manages in equities.
Prime Minister Narendra Modi also favours the EPFO, the primary pension fund manager, to diversify its holdings to enable higher payments to its 80-million payroll members. For the past financial year ended March, the fund set a 8.75 per cent return — which pales in comparison to an 18.7 per cent return for the California State Teachers’ Retirement System in the United States.
Currently, the EPFO keeps almost 70 per cent of its annual collections in government bonds, while a quarter is put into state-run companies’ paper and the remaining five per cent in triple-A rated corporate debt.
With flows into domestic funds also picking up since May, thanks to the bullish stocks markets, there would be sufficient cash to absorb an expected increase in free floats when the government kicks off its divestment programme in a host of state-controlled companies, including in Steel Authority of India Ltd and Oil and Natural Gas Corp.
Growth, inflation surprises
Doubtlessly, the demand for Indian shares is driven by the growth prospects for the economy, Asia’s third-largest after China and Japan. After the pace of economic expansion almost halved to below five per cent for two years in a row, a recovery is building steam. With the new government that took office in May speeding up decision-making, particularly in removing bottlenecks and approving projects, there is a general improvement in business sentiment.
Global and domestic investment houses vouch for the change underway.
“Our meetings with government officials and policymakers have increased our confidence that government policy action will be forthcoming, which will help to gradually reverse the productivity-weakening policies,” economists Chetan Ahya and Upasana Chachra at Morgan Stanley said in a note.
“As the government continues to deliver on the right policy measures and returns on investment improve, it will reinvigorate animal spirits and the corporate sector will have incentive to lift capex.”
The US investment bank expects India’s GDP growth to accelerate to 7.2 per cent by the March quarter of 2017 from 5.7 per cent in the past June quarter. Well ahead of this consumer price inflation could head towards six per cent by the quarter ending December 2015, close to the Reserve Bank of India’s comfort zone after eight years.
Consumer price inflation, which stood at 7.8 per cent in August, could drop to 7 per cent or lower in September, according to Sajjid Chinoy at JP Morgan.
“A confluence of factors has reduced inflation risks over the last few weeks. The monsoon is tracking a robust 65 per cent above normal in September, bringing the cumulative monsoon deficit down to about 10 per cent from 18 per cent just two weeks ago and 44 per cent at the end of June,” he said.
“More important, food prices have softened in September on a sharp mean reversion of vegetables prices. Furthermore, commodity prices have continued to correct and are another 2-3 per cent softer than a month ago.”
Price control
Shares in drugmakers such as Ranbaxy Laboratories, Cipla and Cadila Healthcare are likely to fall after the government slapped a cap on prices of 36 drugs to make life-saving medicines affordable to the country’s largely poor people.
The latest additions would take the total drugs under price control to 384, and constitute about 30 per cent of the drugs sold in India.
The writer is a journalist based in India.
