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Registering their best half yearly gains in five years, the S&P BSE Sensex and the CNX Nifty rose 20 per cent each in the first half (January–June) of this year, the most since 2009 (in the second half of that year, they had gained 21 per cent). The indices had recorded a 50 per cent rise in the first of 2009, after the United Progressive Alliance was voted back to power for the second term.
“The outperformance has been in a hope of a better tomorrow. Even after the elections, whatever noises have come from New Delhi have been, more or less, positive,” says Ambareesh Baliga, managing partner (global wealth management), Edelweiss Financial Services.(A FLYING START)
The euphoria trickled down to the mid- and small-cap segment, too, with about 100 of the 780 counters in the BSE 500 mid-cap and small-cap index seeing price appreciation of about 100 per cent; 211 stocks gained 50–100 per cent. So far this year, foreign investors have pumped in $10 billion, or about Rs 60,000 crore.
The road ahead
The market rally comes amid challenging macroeconomic conditions and prospects of a deficient monsoon, which could stoke inflationary trends. Analysts view the monsoon and the coming Union Budget to be the two most important near- to medium-term triggers for the market; they say a progressive Budget and reform initiatives could see Indian equities outperform their emerging market peers.
“The Budget is an important event which the markets look forward to, as the government is likely to make its intent clear on most issues, as well as how it plans to achieve these goals. It is a tightrope walk for the government. I think the markets have discounted most positives. However, we still remain in a long-term bull market that could take the Nifty to 8,500–9,000 levels by the end of 2014 and one should use dips to buy in,” Baliga says.
At the global level, a rise in crude oil prices is a concern. “India has been the best-performing market year-till-date. But now, it faces two headwinds that could lead to near-term consolidation— worry that the El Niño phenomenon could lead to a poor monsoon and second, the strife in Iraq and the consequent rise in oil prices poses a risk to inflation,” says Bank of America-Merrill Lynch Managing Director and head of research, Jyotivardhan Jaipuria.
Analysts, however, aren’t really worried about the US Federal Reserve winding down its bond-buying programme. Sanjay Mathur, managing director and head of economics research for Asia-Pacific (ex-Japan), Royal Bank of Scotland, says, “We expect the US Fed exit will be disruptive, but the issue is to what extent. We do not expect the same kind of tribulations as in May 2013, when the issue of QE (quantitative easing) tapering first surfaced in financial markets. At that time, several non-Japan Asian economies were suffering from worsening external imbalances. These imbalances have considerably receded.”
Gautam Chhaochharia, head of India research at UBS, believes investors will be willing to give a premium on growth hopes and look beyond the FY15 earnings estimates. “Based on our top-down expectation of 15 per cent earnings growth in FY16 and 15 times the PE (price/earnings ratio), our Nifty target for 2014-end is 8,000. There could be upside to the target, based on how policy-making evolves,” he says.
Jaipuria expects the markets to be re-rated, led by expectations of a surge in reforms and an economic recovery in 12-18 months. For the Sensex, he has a year-end target of 27,000.
