Markets may move into a new range

While valuations & global uncertainties are near-term issues, earnings will sustain premium valuations.

India’s stock markets have largely been range-bound (14,500-18,100) in the past year, with the BSE Sensex rising to (or coming close to) 18,000-levels on a few occasions, only to then slide back and find support at 15,400-15,900 levels. On Monday, yet again, the Sensex briefly scaled to 18,010.07, a shade away from its 28-month high of 18,047.86 made this April, before closing at 17,937.20. Notably, the Nifty scaled to its 29-month high (intra-day) of 5,402.70 on Monday, before closing at 5,383. The question is, will it be different this time?

If market pundits are to be believed, this time the markets could move past its recent highs. While not everyone is gung-ho about the near-term prospects of Indian markets, largely due to its outperformance vis-a-vis other global markets, many experts say the underlying sentiments remain bullish, albeit with some caution. And, barring exceptional events, markets could move into a new range over the next two to three months.

Standing out, but not cheap
Amid the global crisis, the Indian economy stood out well and is now estimated to grow at 8-9 per cent in the current and next financial years. This is in far contrast to most of the developed and other emerging economies, barring China. India’s improving growth rates are also visible in recent robust industrial production and tax collection numbers. All these have helped Indian markets outperform its peers and should help deliver healthy returns, going ahead.

While the long-term prospects remain unquestionable, most experts sound positive over the market’s near-term (three months) direction, too.

Says Sameer Arora, Fund Manager, Singapore-based Helios Capital Management: “Giving specific numbers to where we are exactly headed would not be appropriate, but we may be somewhere around current levels and not too far. Still, the bias remains towards an upwards direction, unless there is any extreme bad news globally.”

Andrew Holland, CEO, Equities, Ambit Capital, sounds more bullish. While he expects the Sensex to be in the 16,000-18,000 range in the near term, post September, Holland says it will break out and there will be a major upside.

On the other hand, U R Bhat, managing director, Dalton Capital Advisors (India), says, “Based on fundamentals, almost all positives are priced in at present levels. The only factor which can drive the market further is robust FII (foreign institutional investor) inflows.”

While FII flow is among the key factors that will influence the future direction of Indian markets, the robust outlook for India Inc earnings (another key factor) should help Indian markets deliver healthy returns. Even as some of the earnings growth may get capped due to possible downgrade in earnings of commodity producers, experts believe the overall picture looks healthy.

Says Raamdeo Agrawal, director and co-founder, Motilal Oswal Financial Services, “IIP (Index of Industrial Production) and tax collections numbers are good and suggest that corporate earnings are going to remain strong.” Likewise, S Naren, CIO, Equities, ICICI Prudential AMC, says, “While valuations are expensive when compared to other markets, earnings growth is keeping pace.”

Among the key things to watch out on the global front are the events in Europe (ongoing bank stress test) and US economic data, and corporate earnings in India.

Stars vs laggards
Since the global situation is still far from comfortable, there could be events in the interim that could lead to market corrections. Unless the event is big enough to push global economies towards a double-dip recession, experts say investors should use such events (market corrections) to buy fundamentally sound and fast growing companies operating in the domestic space.

While the mid-cap space could help outperform broader markets, a stock specific is advisable and will be crucial in determining overall portfolio returns. Among sectors that investors could look forward to in picking stocks are banking, consumer plays (like FMCG, auto, retail), education and, importantly, infrastructure.

Holland believes the new mining policy (which help tie-up coal linkages) and more clarity on foreign investment in the sector during the US President’s visit in November should lead to a demand for the sector.

On the other hand, Agrawal believes that within the banking space, public sector banks should do well. He also likes stocks of oil marketing companies and telecom service providers, which have been out of favour, and expects these to deliver better returns.

While some other experts don’t exhibit confidence over the prospects of telecom companies, all of them are unanimous about commodity (metal) sector companies underperforming the broader markets.

Among the few global plays, experts believe pharmaceutical (helped by domestic mergers and acquisitions) and information technology companies should churn in good returns, led by healthy export demand.

(Contributions from Vishal Chhabria, Ram Prasad Sahu, Mehul Shah and Palak Shah)