Foreign fund flows and quarterly earnings should guide Indian shares in the coming week, while betting on the outcome of general elections would also play a leading role in the direction of financial assets in Asia’s third-largest economy.
There is little doubt that economic and political factors weigh in equal measure in investment decisions by overseas investors, the main driver for the domestic stock market. This was in full display when the market rebounded strongly this week after a bout of profit taking, bolstered by nuanced comments that hinted at the possibility of a change in government.
The US, which has been at odds with Narendra Modi for more than a decade, has softened its stance significantly as the charismatic but controversial leader looks likely to head the next coalition in New Delhi.
“India, the world’s largest democracy, must decide its own path to the future,” Nisha Biswal, US assistant secretary of state for South and Central Asia, said in a speech at Harvard University’s Kennedy School of Government on Wednesday.
“Will it make the reforms necessary to attract investment? Will it capitalize on the opportunities that lie in front of it? Those are the questions that India’s voters are asking as they cast their ballots and those are the questions that we want to see answered,” she said.
Biswal, who wants India-US bilateral trade to quadruple to $500 billion (Dh1.8 trillion), said India had the potential to exceed all expectations economically, but needed to adopt investment and tax policies that would attract, not deter, capital flows and a system of timely regulatory approvals and contract enforcement.
Policy paralysis
The comment was seen by fund managers and stock traders as a subtle recognition of Modi-led Bharatiya Janata Party’s stand on major policy. The incumbent coalition headed by the Congress party would be routed in the elections, according to all opinion polls, because of the policy paralysis and retrograde taxes it imposed scared investors and contributed to a slump in economic growth.
More than 814 million people are eligible to vote in the world’s largest democracy, with the five-week long election process scheduled to end on May 12. The results are due on May 16 and all opinion polls indicate the business-friendly BJP is likely to emerge as the single-largest block and is on track to form the next government with the support of its allies and probably other partners.
“From an economic standpoint a Modi victory would be a huge morale booster to investment,” said the head of a foreign fund with more than $1.5 billion in Indian assets on condition he not be named because of the sensitive issue. “It will light a fire under the market.”
Both the top-30 Sensex and the 50-share Nifty snapped a three-day fall and rebounded 1.6 per cent apiece on Thursday in the holiday-shortened trading week to close little changed at 22,628.84 and 6,779.40 respectively, suggesting a strong underlying support.
Chartist bullish
The stock indices have scaled a series of all-time highs over the past one month, and a correction over the near term must be seen as a buying opportunity, according to brokerage CLSA.
The Sensex could slip towards 21,483-22,023 in the short term, but could then soar to as high as 39,707 over 12-24 months, the foreign brokerage said in a report and added that the recent breakout in the Indian market suggested the upsurge off 2003 lows was resuming.
“The technical view is aligned with our positive fundamental “trend-reversal” view of India since growth recovery and below-average valuations support market upside. Fundamentally, however, we are looking at more gradual market gains, i.e, around a 15 per cent return compounded average growth rate over a two-year period,” it said.
The brokerage said cyclical stocks should benefit the most in the next one-to-two years on the basis of both fundamentals and technical factors, outperforming export-led shares.
Its picks included Gail India, HDFC Bank, Larsen & Toubro, Maruti Suzuki, Reliance Industries and State Bank of India.
Growth to pick up
Prospects are improving for India’s growth to pull out of a nosedive, and if the next government hit the ground running there could be some bonus along the way.
“Our sense is that the growth will pick up this year — 5.5 per cent this year going up to 6.25 per cent next year and rising to just below 7 per cent may be over the medium term or little bit higher if things go well,” IMF senior resident representative Thomas Richardson said in New Delhi this week.
“So we are pretty optimistic about growth over the medium term ... we are bullish about India over the medium term given the favourable demographics you have got.”
Asked what priorities he would like to see from the next government, he said: “Bringing the fiscal deficit down, broadening the tax base. Those things also contribute to improve the business environment and making India a great place to invest.”
India’s nearly $2 trillion economy is expected to have expanded at a decade-low 4.9 per cent in the financial year that ended on March 31.
Challenges
Standard & Poor’s said it may upgrade India’s outlook if the government that is elected next month addresses some of the country’s fiscal and economic challenges through steps such as passing a goods and services tax.
“If in the future they implement policies that effectively addresses some of the credit weaknesses that I have highlighted, we could revise the outlook to stable again,” said S&P senior director Kim Eng Tan in a webcast.
“In the absence of effective policy action, we could lower the ratings on the sovereign,” he added.
S&P rates India at “BBB-minus” and is the only one of the three major credit agencies to have a “negative” outlook.
Key earnings due next week are: Maruti Suzuki, ICICI Bank, HDFC Bank, Axis Bank, UltraTech Cement, ACC, Ambuja Cements, Cairn India, Hindustan Zinc, Siemens, IDFC and Yes Bank.
The writer is a journalist based in India
