Mumbai: Equity markets are likely to surge on Monday as investors celebrate a decisive electoral mandate for the Congress-led United Progressive Alliance (UPA) and fuel a stock rally on heightened expectations of the next budget, fund managers and analysts say.
Great expectations: Market players hope reforms will get a fresh push. Madhu Kapparath / Mint
The better-than-expected performance of the UPA in the month-long general election eliminated immediate concerns of a split verdict followed by prolonged political uncertainty, and set the stage for a continuation of the rally that has sent the Bombay Stock Exchange’s benchmark index up almost 50% since 9 March.
“The market is going to open maybe 5-10% up (on Monday),” said Motilal Oswal, head of the securities firm that bears his name.
The clear win for the UPA removes the need for it to seek the support of parties such as the Left—which emerged much diminished from the elections—to form the next government.
It also gives Prime Minister Manmohan Singh a freer hand to pursue economic reform held up during the years when the UPA depended on the Left’s support, and bolster growth hurt by a global recession.
“If you want to decouple from the world, this is the time to do it,” said Ramesh S. Damani, a member of the Bombay Stock Exchange. “I think, given the quality of the mandate, the government will push through reforms.”
According to the final results, the UPA has won 261 seats, just 11 short of the 272 needed for a majority in the 543-member Lok Sabha.
Since 9 March, the start of the current rally, India’s bellwether equity index, the Sensex, has outperformed all emerging markets except Vietnam’s, on hopes of an economic recovery starting as early as June. The hopes were fuelled by signs such as gains in auto and cement sales. Last year, the Sensex lost 52%.
“We think the decisive result is a big positive for markets as it will lead to a stable government, removes months of uncertainty, and will allow the Congress the space to pursue reforms. We think pension, insurance, banking reforms and disinvestment may be back on the agenda,” Goldman Sachs said in a research report.
Cash in the pipeline
On Friday, a day before the vote count began, the 30-stock Sensex gained 300.5 points, or 2.53%, to close at 12,173.42. The broader 50-stock Nifty rose 78.2, or 2.18%, to close at 3,671.65.
“There’s lot of cash waiting to be invested,” said Nilesh Shah, deputy managing director of ICICI Prudential Asset Management Co. Ltd, who manages some Rs56,049 crore. “Today, the world is sitting on a 0% interest rate and (investors) are looking to better deployment opportunities.”
Foreign institutional investors, or FIIs, the main drivers of Indian equity markets, bought stocks worth $859 million (around Rs4,260 crore) last week, according to the market regulator, the Securities and Exchange Board of India. They have bought equities worth $3.28 billion so far this fiscal.
Investors are looking to the government to revive stalled reforms. Expectations of the new government’s budget are high.
“This is a much more stronger government and no longer dependent on the Left,” said U.K. Sinha, chairman and managing director of UTI Asset Management Co. Ltd, which manages Rs54,489 crore. “They can get Bills passed.”
The outgoing government left many Bills hanging such as an Insurance Bill, which would enhance foreign equity participation from 26% to 49%, and a pension reforms Bill because of resistance from the Left.
Nurturing green shoots
But the short-term focus of the new government is expected to be on nurturing the so-called green shoots, or the first signs of a turnaround in the slowing economy, with more hard-hitting economic reforms such as those relating to land and labour laws likely only with the passage of time.
In an interview with television channel CNN-IBN on Saturday night, minister of commerce and industry Kamal Nath indicated that the new government might impart another round of fiscal stimulus. The outgoing government has announced three rounds of fiscal stimuli.
“Right now, the first order of business is to get a sustainable economic recovery going,” said Jahangir Aziz, executive director and chief economist in India for JPMorgan Chase and Co.
According to Aziz, over the next three-six months, the only reforms likely are those that are already on the agenda such as more foreign direct investment in retail and insurance sectors, and some banking and pension reforms.
“Once the economic recovery is seen as sustainable, they will begin to think of reforms that can push the economy back to the 9-10% growth path,” he added.
To be sure, the economy is not going to be an easy challenge to master, given a combined Central and state government fiscal deficit that could hit 11% of gross domestic product in 2009-10.
The next budget “will inevitably represent a very difficult balancing act between starting to deliver on potentially expensive election promises and keeping the budget deficit under control”, wrote Robert Prior-Wandesforde, economist at HSBC Holdings Plc., in a 15 May note.
Borrowing concerns to ease
Still, the electoral mandate will also be cheered by the bond market, which had been weighed down by concerns of high government borrowing crowding out the private sector.
Analysts expect the bond market to rally because the verdict opens up new avenues of financing the government’s fiscal deficit, such as the sale of stakes in state-owned companies and increasing FII limits on government securities.
The yield on 10-year government bonds closed at 6.41% on Friday and is expected to decline on Monday. Investors say the government’s market borrowing is unlikely to overshoot the budgeted Rs3.62 trillion for 2009-10 by a great extent as the same political formation takes power. Bond yields and prices move in opposite directions.
“I am more confident that investors should invest in India because of a stable coalition,” said Ravendra Nath, vice-president of institutional equities at brokerage Asit C Mehta Investment Intermediaries Ltd.
The timing of the electoral verdict couldn’t have been more crucial. India, like other emerging markets, is suffering from the collateral damage of unprecedented turmoil in a global financial system that’s mired in toxic debt. The International Monetary Fund expects the world economy to shrink in 2009, the first time since World War II.
A Reserve Bank of India survey of 17 professional forecasters said on Thursday that median economic growth forecasts for the current fiscal had slipped to 5.7% from the previous quarter’s 6%. Exports have slid for seven straight months and industrial output shrank 2.3% in March, the most in at least 16 years.
“It’s very clear what are the critical points: global economic outlook...which is still negative/muted,” said Bharat Shah, who heads ASK Investment Holdings Pvt. Ltd, a wealth manager. “We still are at a critical juncture over what’s happening in the global economy.”
Anup Roy and Ashwin Ramarathinam contributed to this story.