Mumbai: The Sensex, India’s bellwether equity index that has gained some 12% in the past four trading sessions, may well continue its northward move, at least temporarily, fuelled by expectations that the victorious Congress Party will now push ahead with reforms that its previous Left-backed United Progressive Alliance (UPA) couldn’t pull off.
Gaining confidence: Investors watch the BSE ticker on Monday, when the Sensex rose 215 points. Analysts say much of the buying in this week’s mini rally was in sectors that could see some potential policy changes.
Even as the votes were still being tallied, many analysts said they are betting on the rally to perhaps extend for the rest of the week even though, given significant macro issues effecting global markets, none of them saw the UPA’s win as the catalyst for the bulls to be back on Dalal Street for good any time soon.
Indeed, despite this week’s mini-rally, the Sensex has lost at least 30% since January and India remains one of the worst performing markets, especially among emerging economy stock markets, in 2008.
Well before the tumultous voting was concluded Tuesday night, the Bombay Stock Exchange’s Sensex closed at 14,104.2 points, gaining some 254 points, or 1.84%, while the broader 50-stock Nifty index of the National Stock Exchange, gained some 1.94%, or 80.6 points, to close at 4240.
“The rally will continue with the UPA’s success,” claimed Manish Sonthalia, head of equity research at brokerage firm Motilal Oswal Financial Services Ltd.
Indeed analysts note that much of the buying this week was primarily in sectors that could see potential see some policy changes.
Apart from banking and insurance, analysts also hope that telecom and retail could be among sectors that may see some long-promised reforms. Bankex, the BSE’s banking index, has gained 22.75% in last four trading sessions, the most among all sectoral indices. Other indices that have gained substantially are realty, power and captial goods.
If the government pushes for banking sector reforms, one possible outcome is that its stake in India’s many public sector banks may come down below 51%.
“There is strong buying in some sectors where investors expect policy changes to happen,” said Jignesh Desai, head of institutional sales at local brokerage and investment bank SBI Capital Markets Ltd.
According to a dealer on the institutional desk of a foreign brokerage who didn’t want to be identified, there is once again active buying from mutual funds as well as select buying from foreign institutioan investors, or FIIs, the main driver of Indian market. FIIs have sold $6.87 billion of Indian equities this year net of buying, after pumping in more than $17 billionlast year, leading to sharp drops in valuations of many stocks and entire sectors.
“The UPA government without Left parties, is definitely positive for the markets,” said Shashank Khade, who oversees some Rs2,000 crore worth in assets as head of portfolio management services at Kotak Securities Ltd. Still, a “UPA victory has been factored in by the rally,” adds Krishna Sanghvi, who helps manage Rs5,000 crore worth of Indian stocks as the vice president-equities at Kotak Mahindra Asset Management Co.
Mutual funds and other institutions, who were underweight on select stocks and sectors, can now deploy money as the sentiment has turned positive, he said.
“There is ...likelihood of... reforms on privatization, pension, insurance and the bankign sector, and on relaxing restrictions on inflows, as the Left parties, which had long opposed any further liberalization will not be able to influence the outcome,” wrote Tushar Poddar and Pranjul Bhandari of Goldman Sachs in their India Views report released on Tuesday ahead of the vote.
Some analysts expect the government to raise foreign direct investment in the insurance sector from 26% to 49%. Finance minister P Chidambaramhad already proposed this hike but, was forced to backtrack in the face of Left parties’ staunch opposition to his proposal. If the norms are relaxed, significant foreign money is expected to flow in and expand India’s insurance sector.
Reforms also may take place in the pension sector. The government wants to create a statutory regulator for the sector but has not been able to do so because of the Left.
According to the Goldman Sachs duo, markets may see this as a short-term positive, especially when contrasted with the alternative of early elections and uncertainty.