Mount 25000 conquered: Kya Abki Baar Tees Hazaar? Rajesh Agarwal Jindal

FB profile PicEver since the outcome of the Lok Sabha  elections were announced, surprising change in sentiment towards India as an investment destination has been witnessed, Huge FII money has flowed into Dalal Street, in May alone FII’s have invested Rs. 14006.1 crores and for calendar year 2014 the figure stands at Rs. 45804.3 crores for the first five months. Almost every institution has upgraded the index, GDP and earnings target and are quite gung-ho about the changing face of Indian economy.

The level of optimism can be clearly witnessed from the statement of The confederation of Indian Industry (CII) “The economic reforms agenda can be taken forward with a stable political dispensation and a multidimensional tool-box of policy instruments is required to kick-start growth,” said Ajay Shriram, President, CII. “With prudent macroeconomic management, CII expects that the economy could recover to 6.5% GDP growth rate in 2014-15 as against an estimated 4.9% in 2013-14. Continued reforms could take GDP growth rate to 8% level in three years.”

Even the World Bank feels – “With the new Indian government showing signs of economic reorganizations and ushering in an era of transparency in governance the Indian economy could potentially grow at 5.5% this year compared with 4.7% last year. “

With most of the nations across the world having structural challenges and struggling to achieve respectable growth, India under the leadership of a new government is better positioned to achieve this. The hot money flow which has almost dried up in the past few quarters have started coming and is likely to continue as long as the new government delivers on its promises of economic development and governance.

However, the real power of a bull market would only be witnessed once domestic investors start moving funds into equities from other asset class. As domestic investors regain confidence followed by stagnation in other asset class such as gold and interest rates start softening, we are likely to witness strong inflows from domestic institutions into equities. Moreover if income tax slabs are modified / non taxable income limit increased that would be an added trigger.

Domestic investors are still sitting on the fences as the memories of the 2008 crash keep on haunting, it is just a matter of time when these investors would start feeling left out and start to regain confidence, markets are likely to witness $8-10 billion of equity inflows a year.

Valuations after the recent run up might look stretched, at almost 16-17 times earnings Sensex is trading at the upper band of valuation, while frontline stocks might look a bit expensive, there are enormous opportunities in the mid-caps and other beaten-down sectors. As demand picks up, interest rates soften, and return ratios improve, activity in these stocks would accelerate.

All eyes would be on the policy moves, reforms agenda and one of the biggest events ‘The Union Budget’. Huge expectations have been built up and if these are not met or the new government fails to deliver then the outcome would be disastrous. On the positive side though growth oriented approach of the government and the fact that the economy is already on the lower bottom provides a ‘Quantum of Solace’.

In sync with market expectations, Reserve Bank of India (RBI), in its bi- monthly monetary policy left its key policy rate as well as banks’ cash reserve ratio (CRR), or the portion of deposits that commercial banks need to keep with the RBI, unchanged. But it has cut the banks’ mandatory investment in government bonds, or the so-called statutory liquidity ratio (SLR), by half a percentage point to 22.5%, this will infuse Rs.42,000 crore of potential liquidity into the banking system. The cut in SLR illustrates the RBI’s confidence in the new government’s commitment to fiscal consolidation. The biggest positive factor was the statement of the RBI governor – “if the economy stays on course, further policy tightening will not be warranted,” the regulator said, and, if inflation drops below the RBI’s estimate, there will be “headroom for an easing of the policy stance”. This policy sends a strong signal that domestic interest rates have peaked and now can only go down.

The budget which is due next month is likely to throw light on plans of the government towards relaxation of foreign direct investment in many areas – including defence, implementation of GST, divestment, subsidies, DTC and excise and customs duty.  Finance Minister Arun Jaitley’s maiden Union Budget is widely expected to tighten the government’s loose purse strings and populist measures are likely to be steered clear of. The intentions of the FM can be clearly seen in his statement “The challenges are very obvious. We have to restore back the pace of growth, contain inflation, and obviously concentrate on fiscal consolidation itself”.

Globally, Japan’s economic growth was revised higher in the first quarter while the IMF cut its 2015 economic growth forecast for China to about 7%. The IMF has urged the Chinese authorities to avoid further stimulus measures and to concentrate on financial risks mitigation. Japan’s economy grew 1.6% during January-March 2014 compared to the previous quarter, revised upwards from an initial 1.5% expansion due to faster growth in capital expenditure.

In a surprise move The European Central Bank (ECB) has cut interest rates to record lows, launched a string of measures to infuse money into the listless Euro zone economy, and guaranteed to take more steps if required in order to fight the risk of Japan-like deflation. For the first time, the ECB has decided to charge banks for parking funds at the central bank overnight in an effort to make them lend to small and medium-sized businesses. The measures were also meant to ease pressure on Euro, thus facilitating economic recovery and abating disinflation.

The U.S. posted a $130Bn budget deficit in May, the minutest shortfall for the first 8 months of a fiscal year since 2008, as a stronger economy and rising employment strengthened revenue. The deficit last month was nearly $9Bn less than the $139Bn shortfall in May 2013. According to the Treasury Department, May deficit stood at $130Bn after a surplus of $106.9Bn in April, a month when the government usually runs surpluses because of a flood of tax revenues. After hitting a high of $ 1.4 trillion in 2009, the deficit has been declining and dropped to $680.2Bn last year.

Back home, Output of the 8 core sectors grew 4.2% in April, compared with 2.5% in March. The rise was primarily aided by electricity generation and the fertiliser and cement segments. The core industries have a weight of 38% in the IIP.

Consumer price inflation (CPI) eased to 8.28% in May from a three-month high of 8.59% in April aided by lower food prices. For the past two years CPI had been rather sticky at around 10% making it difficult for Reserve Bank of India (RBI) to cut interest rates even though economic growth fell below 5%.

Activity in India’s huge services industry expanded for the first time in nearly a year in May, aided by a surge in new business. The HSBC Services Purchasing Managers’ Index, compiled by Markit, rose to 50.2 in May from 48.5 in April, the first rise above the 50 mark that divides growth from contraction since June last year. Manufacturing activities rose in May compared to the previous month on increased orders, according to HSBC Manufacturing PMI. The measure of factory production was up at 51.4 points in May from 51.3 points in April and March.

Coming to the sectoral news, for the first time, India overtook China in net addition of mobile subscribers in the January-March quarter this calendar year, as per the biannual Ericsson Mobility Report on global usage of mobile phones. During the quarter India added 28Mn mobile users, while China’s subscriber base swelled by 19Mn, unlike the past few quarters, when China consistently topped the net-addition chart. In the first quarter of 2014, India had 790Mn mobile subscribers, against China’s 1.25Bn, a variance of 460Mn. This gap was lower at 431Mn in the same quarter of last year.

Domestic passenger car sales grew by 3.08% to 1, 48,577 units last month as compared with 1, 44,132 units in May 2013. As per data released by SIAM, motorcycle sales in May this year grew by 11.71% to 9, 84,469 units as against 8, 81,288 units in the year-ago period. Total two-wheeler sales during the month grew by 16.3% to 14, 02,830 units from 12, 06,173 units in the same period of the previous year.

To sum up, overall the investor’s sentiment is expected to remain positive as investors across categories remain highly expectant of an economic turnaround. While the process of returning Asia’s third largest economy back on the high growth trajectory is bound to be an extremely challenging task for the new Government, most investors now seem to believe that the worst seems to be over and the major sectors of the economy seem to be looking up. This apart the World Bank’s comments on India’s potential GDP growth remain booster for investor’s sentiments. We expect to see its positive impact on the Indian bourses.

While we continue to believe that markets will gradually trend higher. However, problems in the Middle East, which have impacted oil prices, needs to be watched carefully as they pose a potentially material threat to markets. Brent, which had been stable, has risen to over US$113. Secondly, The Met Department has retained the below average forecast of monsoon rainfall in the Country. The Prime Minister’s assurance of adequate contingency measures to tackle the situation would be tested in the days ahead.

On the whole we expect the Indian markets to maintain it’s up move with a fair share of volatility.  With expectations of an investor friendly budget and the return of retail investors to the equity market the question remains “Kya Abki Baar Tees Hazaar”

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(Working as Head-Research at Eastern Financiers Ltd, am a post graduate in commerce from Calcutta University, and have gained wide experience in the last 18 years. Prior to joining Eastern Financiers, I have gained in depth knowledge of the Financial Markets while working with Capital Market Publishers, Lohia Securities & CD Equisearch. As head of the Equity Research Wing, I appear regularly as Guest Analyst at CNBC, Awaaz, CNN-IBN, NDTV Profit , Zee Business,Bloomberg UTV, ET Now & R Plus.)