Mumbai: This Diwali, investors will welcome the Hindu new year Vikram Samvat 2066 with more gusto than usual. After all, they are richer by $684 billion (Rs31.67 trillion), with the Sensex, India’s bellwether equity index, rising at least 91.53% since the last festival of lights, the best gain in at least 10 years. The coming year too will see growth, traders say, though the ones who have been around for a long time and seen it all advise temperance in light of the meteoric rise and rich valuations.
“The mood is upbeat; we have seen two extremes in the space of a year,” said Motilal Oswal, chairman and managing director (MD) of the brokerage bearing his name. “We can’t rule out a sharp correction. When there is a sharp rise, there could be sharp falls too. When it will happen is the question.”
The scene was very different a year ago. The festival, when brokers worship the Hindu goddess of wealth Lakshmi, came at the onset of a global economic credit crunch that was set off by the fall of American investment bank Lehman Brothers Holdings Inc. This time last year, equities had lost almost half their value since the previous Diwali, foreign investors were pulling out from Indian stocks and the outlook was grim. The mood didn’t change despite a 5.86% rise in the Sensex on 28 October 2008, during the one-hour muhurat trading where traditionally investors make token buys.
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That 5.86% gain was far in excess of the less than one percentage point swing typically seen during muhurat trading. In fact, the average gain during one-hour muhurat trading every year in the 2003-07 bull run was 0.24%. Volumes during this special trading are usually about one-fourth of average trading volumes.
Things have turned around since the last muhurat trading day. The markets have pulled back sharply, with Indian shares rising the sharpest among those in $1 trillion-plus economies this year. Economic growth forecasts have been upgraded, company earnings have bounced back and foreign investors have returned in droves.
“There is a lot of confidence now because of the strong economic recovery undercurrent,” said Deven Choksey, MD of Kisan Ratilal Choksey Shares and Securities Pvt. Ltd. “Corporate earnings have surprised positively and expectations are that the second half of the (fiscal) year is going to be even better.”
Economic indicators such as industrial production and export growth are getting better. Factory input increased 10.4% in August, the most in 22 months, and the rate of decline in exports is slowing.
“Optimism is there, sentiment is there, liquidity is good,” said Rashesh Shah, chairman and MD of Edelweiss Capital Ltd. But he pointed out that there is some concern on inflation and the rupee gaining over the dollar.
Indeed, inflation is rearing its head again, even as growth expectations in key sectors such as software and textile exports are muted because of the rupee’s rise. Wholesale inflation gained 0.92% for the week ended 3 October. With economists predicting this number will touch at least 6% by the end of March, India’s central bank will have to start considering raising interest rates, a move that could hurt growth.
Foreign institutional investors, the main driver of Indian equities, have so far bought stocks worth at least $13 billion this year and the dollar flow has bumped up the rupee to a 13-month high of 46.25 to a greenback. With liquidity flows to emerging markets such as India predicted to be strong for some more time, a further strengthening of the rupee could hurt exporters as the rupee value of their dollar earnings goes down.
Yet another concern, according to Ved Prakash Chaturvedi, chief executive officer of Tata Asset Management Ltd that manages around Rs20,000 crore, is global sentiment. Indian markets now move in tandem with other markets around the world, though the degree of correlation varies.
“Liquidity till now has papered over the cracks in the system,” said Chaturvedi. “Large economies (such as the US and the UK) will eventually have to adjust to a savings-oriented scenario”, from the present consumption-led one. This could have repercussions on metrics such as emerging market exports.
Unlike in the past, this time around muhurat trading is taking place when the earnings season has just begun. With early results indicating that the earnings rebound is on, brokers are advising investors to stay invested, though selectively, and buy during Saturday’s special trading hours.
Ashwin Ramarathinam and N. Sundaresha Subramanian contributed to this story.
Graphics by Yogesh Kumar / Mint