Investors bet big on UPA’s reform pace

Mumbai: With a near 6% jump on Wednesday, the Sensex, India’s bellwether equity index, has clawed back around 19% in just five trading sessions as investors sought refuge in the belief that a victorious Congress party will push harder for its previously stalled reformist agenda.

Overlooking the fact that global economic conditions that have pushed many markets down haven’t altered in recent days, beyond a softening in crude oil prices, the Sensex gained 838 points to close at 14,942.28 on Wednesday, while the National Stock Exchange’s 50-stock Nifty index added 236.70 points, or 5.6%, to close at 4,476.80.

The gains weren’t just an automatic bounce from Tuesday’s developments, claimed traders. “There are many fresh long positions building up," said Seshadri Bharathan, director (stock broking) at Dawnay Day AV Securities.

Both the benchmark equity indices are now close to psychologically important levels of 15,000 for the Sensex, and 4,500 for the Nifty.

The “Sensex could move up another 1,000 points, if global cues remain positive" predicted Anurag Tripathi, head of equity research at brokerage firm Almondz Global Securities Ltd.

But analysts don’t expect the rally to really sustain unless oil prices retreat further and inflation cools. As a result, “on the flip side, the market could turn lower again on any fresh negative news", noted brokerage India Infoline Ltd in a note to clients.

The quick run-up in the Sensex recently was supported by a rally in global equity indices that have moved inversely proportional to the price of crude, which saw a sharp correction to $125 (Rs5,288 today) a barrel from record levels.

In a research report titled Demand Demolition, commodities analysts at US investment bank Lehman Brothers Inc., predicted oil prices will continue to ease. “The deteriorating demand picture reinforces our belief that oil prices are approaching a tipping point, with prices expected to average $110/barrel...(in fourth quarter of 2008), and a further decline to a more supportable $90/barrel by 1Q (first quarter) 09," the report said.

The Sensex got a jump-start as all key Asian markets, many of which open for trading before traders start buying and selling in India, recorded strong gains on Wednesday.

The Bombay Stock Exchange’s (BSE) sector basket of bank stocks have witnessed a huge rally in the past five sessions: about 35%. The BSE Bankex gained 10% on Wednesday alone. “Some large bank stocks are proxy for playing the insurance reforms," said the head of equity research at a foreign brokerage, on condition of anonymity.

Analysts expect India’s foreign direct investment limit for insurance companies will be raised from 26% to 49%. Markets are also betting on voting rights for foreign investors, in proportion to their equity holding in banks, from the current cap of 10%.

Apart from these, analysts expect divestments in state-owned companies and the pension Bill, or the Pension Fund Regulatory and Development Authority Bill, which allows private sector more participation in the sector, to be passed. Also, companies that stand to benefit directly from the nuclear deal, were also on demand (see related story on M1 in Markets Watch).

Meanwhile, some India-dedicated funds and pension funds had started bottom-fishing when the Sensex fell below 13,000 levels, said brokers. “Some FIIs (foreign institutional investors) are accumulating frontline stocks," claimed Nilesh Shah, chief executive of Ambit Securities Broking Pvt. Ltd.

On a net basis, FIIs had sold $7 billion worth of Indian stocks in 2008. But as on 16 July, they have turned net buyers.

Barclays Wealth Research division of Barclays Plc. reiterated the thesis of asset allocation in the so-called Bric markets for portfolio funds as “long Brazil and Russia, funded by shorting China and India", in a quarterly report.

The direction of Indian stock markets will strongly depend on the outcome of the central bank’s quarterly review of its annual monetary policy on 29 July, as the markets have already priced a rate hike, said brokers. “If the rates are left unchanged, there will be more cheer," said Shah of Ambit.