Economic growth spurs rising equity market; rupee also gains

Economic growth spurs rising equity market; rupee also gains
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First Published: Fri, May 29 2009. 10 15 PM IST

Strong performance: The Bombay Stock Exchange’s Sensex index rose 2.3% to close at 14,625.25 on Friday, a level last seen in September. Punit Paranjpe / Reuters
Strong performance: The Bombay Stock Exchange’s Sensex index rose 2.3% to close at 14,625.25 on Friday, a level last seen in September. Punit Paranjpe / Reuters
Updated: Fri, May 29 2009. 10 15 PM IST
Mumbai: Better-than-expected economic growth numbers made investors rush to buy stocks, sending the equity markets soaring on Friday. The rupee, too, gained on expectations of strong foreign inflows.
The 30-stock Sensex, India’s bellwether index, gained 2.3% to close at 14,625.25, a level last seen in mid-September. With this, the Sensex has gained 28.3% in May, its strongest monthly performance in 17 years.
The broad-based 50-stock Nifty rose 2.58% to 4,448.95.
Strong performance: The Bombay Stock Exchange’s Sensex index rose 2.3% to close at 14,625.25 on Friday, a level last seen in September. Punit Paranjpe / Reuters
“Money chases growth,” said Gopal Agarwal, head of equity at Mirae Asset Global Investments (India) Pvt. Ltd. “The GDP (gross domestic product) numbers are not only a sentiment booster. If in the worst of times, we can grow 6.7%, when things are better we can bounce back to 9% growth.”
India’s GDP grew 5.8% in the January-March quarter beating economist estimates. GDP for the whole fiscal year was 6.7%, lower than the 9% recorded the previous year.
The latest growth figures prompted brokerages to revise GDP forecast for the current fiscal and next. For instance, Sonal Varma, India economist of Nomura Financial Advisory and Securities (India) Pvt. Ltd, raised GDP estimate for fiscal 2010 to 6.3%, from 5.3% as “there are signs that the economy has started to stabilize”.
Rajeev Malik, head of India and Asean (Association of Southeast Asian Nations) economics at Macquarie Capital Securities, Singapore, also revised the growth projections. “Essentially, under reasonable and realistic assumptions about what the government can/will do, we expect an earlier move toward realizable trend growth of 7.5-8% per annum.”
According to him, the revival in capital markets is a key factor in healing the crippled investment cycle.
Foreign institutional investors, the largest category of investors in Indian equity markets, pumped in $4.2 billion (around Rs19,870 crore today) since January this year after taking out close to $13 billion from Indian markets last year. This has pushed up the Sensex 79% since 9 March, the start of the current rally.
“There is a liquidity overhang now,” said Ved Prakash Chaturvedi, chief executive of Tata Asset Management Ltd, which manages assets worth Rs19,438 crore. “There are very few markets where there is growth now. This liquidity has to find its way somewhere and many investors could prefer emerging market equities.”
Expectations of more foreign money waiting to be invested in India drove the rupee up against the dollar even as the greenback depreciated against all major currencies.
The rupee advanced 6.4% this month to close at 47.09 a dollar, a five-month high, according to Bloomberg.
Dealers said the rupee could have gained more, but for central bank intervention. The Reserve Bank of India bought around $400 million from the market to rein in an appreciating local currency, as a rising rupee hurts exporters since their dollar income in rupee terms goes down.
Dealers expect the rupee to hover around 47 a dollar level for some more time and strengthen further, but chances of depreciation are less.
There was no cheer from the bond market though despite the good GDP numbers, as the threat of government over-extending its Rs3.08 trillion borrowing programme continued to discourage risk appetite. The benchmark 10-year bond yield closed at 6.70%, from 6.73% on Thursday.
Fund managers expect the rally in the equities market to continue, but cautioned that a lot also hinges on the performance of the government, which has built up a lot of expectations after its win.
The question is “whether the government is able to go back to governance—get demand started, improve infrastructure”, said Sameer Kamdar, chief executive of the proposed asset management company from the ASK Group. “The markets have a lot of expectations regarding disinvestment, privatization and (freeing) foreign direct investments. If these do not happen, this could lead to a short-term sell-off.”
“I can’t see it (Sensex) rising beyond 15,000 unless we see earnings upgrades over the next one year,” said Sanjeev Prasad, Kotak Securities Ltd’s head of research. “Blanket buying post the election outcome has happened. Now, for the markets to rise further, looks a stretch.”
The index may fall to as low as 11,000 over the next 12 months, he added.
Shares in the Sensex trade at an average 14.8 times future earnings, up from their 2009 low of 8.83 on 11 March, according to data compiled by Bloomberg. China’s Shanghai Composite Index is valued at 17 times future earnings, Brazil’s Bovespa trades at 10 times and Russia’s RTS index trades at 6.8 times earnings.
Robert Prior-Wandesforde, senior Asian economist at Hongkong and Shanghai Banking Corp. Ltd, is one of those who is not hugely excited about the GDP numbers.
He has not changed his growth forecast. According to him, the pace of reform is likely to remain slow and cautious, and “the benefits of economic reforms typically take a couple of years to filter through”.
Anup Roy and Ashwin Ramarathinam of Mint, and Rajhkumar K Shaaw and Pooja Thakur of Bloomberg contributed to this story.
ravi.k@livemint.com
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First Published: Fri, May 29 2009. 10 15 PM IST
More Topics: Sensex | Bombay Stock Exchange | BSE | Rupee | Equity |