Nothing breeds success like success. The adage is playing out on Indian stock markets, which roared to record highs yet again this week, swatting away doubting Thomases about the sustainability of the rally, after forecasts for bountiful monsoon rains added fresh ammunition to the bullish fervour sweeping the bourses.
There are many fundamental things happening in the subcontinent, from faster decision-making to single-minded focus to raise the bar on implementation of plans. The beehive of activity across the country, particularly in infrastructure projects, is putting a can-do stamp of confidence among work managers to meet deadlines.
The number of projects that were delayed has dropped by nearly two-thirds in two years, while cost overruns — a bane of government investment — have almost halved. New Delhi’s hands-on approach from policy formulation to implementation is making a difference in governance, a far cry from the laid-back attitude of previous administrations.
The changing scenario has caught the eye of ordinary people, who are increasingly funnelling their savings into equities and bonds for better returns. Falling interest rates have also dimmed the lure of term deposits, while the traditional preference for gold and property is declining. Assets managed by equity funds stood at a record Rs. 5.47 trillion at the end of March.
“The most significant driver of this rally has been the shift in asset allocation on the part of retail investors from traditional physical assets like gold or real estate to equities,” Dhiraj Sachdev, a fund manager at HSBC Asset Management, told ET Now television channel.
“This rise in equity culture is a very powerful driver of a sustained rally. I do not think the markets will stop here. Corrections will happen for sure but it will be very sharp and short lived. So people will buy into it.”
The top-30 Sensex closed at 30,188.15, after hitting an all-time high of 30,366.43 on Thursday. The broader 50-share Nifty ended at 9,400.90, off a record high of 9,450.65. Both the indices gained 1.1 per cent over the week.
Gush of liquidity
Investors ploughed Rs. 94 billion into equity plans in April, more than double the cash flow from the same month a year earlier, according to data from the Association of Mutual Funds in India. Stock funds took in Rs. 704 billion in the financial year ended March, registering a third consecutive year of inflows. Retail accounts in equity-linked schemes leapt by 5.8 million in 2016-17 to 44 million, data showed.
The heavy flow of cash into the stock market has driven prices of many stocks to either multi-year, or record, highs, triggering concerns about a bubble. With price-earnings multiples of benchmark indices at their highest in seven years, the question of overvaluation is something to reckon. For weeks, pundits have been recommending to take profits, and a few foreign funds did follow the advice, but markets have continued to surge.
Bulging pockets of domestic funds have become a big counter balance to foreign cash flows. In April, despite sizeable profit-taking by overseas investors, the benchmark index was unruffled in its upward march.
Sachdev says it would be wrong to conclude that the rising tide has lifted valuation of all companies. Indian bourses offer variety that is unmatched elsewhere. To begin with there are more than 5,000 listed companies, many in the mid- to small-cap group. There are several gems among them that could be a gold mine for the right stock picker.
New businesses and sectors are striking out on their own. Private-sector insurers, for instance, are getting listed. Earlier they were a division of banks or an affiliate. SBI Life Insurance Co Ltd is planning an initial public offering this year for up to $1 billion. State Bank of India (SBI), the parent, will sell eight per cent and partner BNP Paribas Cardif aims to cash in four per cent, according to an exchange filing.
Currently, SBI owns 70.1 per cent and BNP Paribas Cardif 26 per cent, while private-equity firm KKR and Singapore’s Temasek each hold 1.95 per cent.
ICICI Prudential Life Insurance Co was the first insurer to go public last September, when it raised about Rs. 60.6 billion.
Pathology and diagnostics companies are also going public, providing a new avenue for investors in a country that boasts the world’s second largest population and immense potential.
“I do not think that broader market even at 18 times earnings is not all that expensive,” Sachdev said. “There are certain pockets and segments where some mediocre businesses may have run ahead of time, some IPO listed companies may have run ahead of time and there is frenzy out there. One should be avoiding it and scrape through to find out good companies or sectors.”
Inflation dips, factory output up
Data released after the market closed on Friday should cheer investors. Retail inflation fell sharply to a lower-than-expected 2.99 per cent in April, from a near five-month high of 3.89 per cent in March, thanks to a drop in food prices. The consumer price inflation is a determining factor for the central bank to decide on interest rates.
Industrial production, measured under a new base year and with tweaks to capture new items, grew 2.7 per cent in March and five per cent in 2016-17 financial year. Under the old series, the growth in 2016-17 was a mere 0.7 per cent, and 2.5 per cent in March.
The data is encouraging but the Reserve Bank of India is unlikely to ease interest rates anytime soon because of lingering concerns about the impact from a new Goods and Services Tax that will roll out from July. Additionally, the central bank would likely take a call only after the monsoon that is crucial to India’s economy.
The annual rainy season is expected to start on the dot in the Andaman Nicobar Islands around May 15, and hit the mainland over the southwestern Kerala coast two weeks later, according to the India Meteorological Department (IMD), the official weather forecaster which uses sophisticated tools to predict the monsoon.
Good showers during the four-month monsoon provide a big thrust to India’s $2 trillion economy, such as farm output as well as rural incomes. As about 70 per cent of the country’s 1.3 billion people depend upon farm-related activity for their livelihood, the rains play a significant role in the fortunes of companies.
Housing and related industries would become a sweet spot for investors as Prime Minister Narendra Modi pushes ahead with plans to ensure homes for all. Rising incomes and best affordability in two decades should see investments in housing top $1.3 trillion over the next seven years, according to securities house CLSA.
The brokerage expects 60 million new homes to be built between 2018 and 2024, creating about two million jobs annually and giving a tailwind of as much as 75 basis points to the gross domestic product.
“The housing sector is at a tipping point and will be the economy’s next big growth driver,” analysts led by Mahesh Nandurkar wrote in a note. “The catalyst is the government’s big push for an ambitious housing programme.”
The writer is a journalist based in India.