BackGDP, stocks up; analysts cautious
Corporate earnings may improve, but market gains are likely to be higher in the medium to long term
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Backed by the 5.7% growth in gross domestic product (GDP) in the first quarter of the current fiscal, the Indian stock market opened on a positive note on Monday with CNX Nifty of the National Stock Exchange (NSE), crossing the psychological level of 8,000 points for the first time. At the end of the day’s trade, the Nifty was up 73.35 points, taking the total year-to-date gains to 27.34%.
The benchmark index has also gained 46.71% on a year-on-year basis. The S&P BSE Sensex ended the day with gains of 0.86%
The GDP numbers released on Friday showed that the Indian economy in the first quarter of the current fiscal (April-June 2014) has expanded at the rate of 5.7%, year-on-year, compared with the growth of 4.7% in the same quarter last year, signalling that the worst is over.
Among the components of GDP, manufacturing played a critical role as the activity in the sector expanded 3.5% compared with a decline of 1.2% in the first quarter of the previous fiscal. The mining sector also bounced back and posted a growth of 2.1% compared with a decline of 3.9% in the same quarter last year.
While the numbers do suggest that the economic activity is on a path of recovery, the pace might get affected because of subdued monsoon, its impact on agricultural output, and the dependent consumer demand in rural areas.
“Overall, the economic data has been quite encouraging, indicating the bounce back in domestic demand. The lead indicators have also been signalling sustenance of this recovery. If the existing momentum continues, we see an upside risk to our FY15 forecast of 5.5%," said a note from ING Vysya Bank Ltd.
A note by Nomura, analysing the GDP numbers, said: “… data are very encouraging as they suggest incipient signs of a domestic-demand recovery after nearly two years of stagnation. The growth mix—led by investments—is also a positive and we expect the recovery to be sustained."
However, the growth in the first quarter was also partly pushed by higher government expenditure.
“The jump in June growth partly reflects deferral of public expenditure to the June quarter from March to show a lower-than-targeted 4.6% FY14 fiscal deficit. As a result, social services jumped 9.1% in the June quarter from 3.3% in March. Had social services grown at, say, 6% in the two quarters, growth would have worked out to a more comparable 5.3% for June and 4.9% for March," said a note from Bank of America Merrill Lynch (BoAML).
The government and the central bank also expect economic activity to improve in the current year.
“The Indian economy could grow in the range of 5-6% in 2014-15 with risks broadly in balance around the central estimate of 5.5%," noted the Reserve Bank of India in its annual report, released in August. The Economic Survey, released in July, had pegged the growth in the current year between 5.4% and 5.9%.
The pick-up in economic activity is also likely to revive earnings for corporate India. “We continue to be bullish on the Indian market and believe that buying on dips is a particularly compelling strategy. Our bullishness on the Indian market is driven by our view that the earnings have turned the corner and we will likely see earnings doubling over the next four years. We think market returns could mirror earnings growth," said another report from BoAML.
However, with markets hitting fresh highs on the back of strong gains this year, analysts have started sounding a note of caution. “The GDP numbers are in line with expectations and will remain subdued in the next two quarters," said Sandip Sabharwal, a Mumbai-based fund manager. He also takes a view that the market has seen the best of 2014 and is unlikely to go up significantly from these levels. “Investors should be cautious as there could be a correction because of international factors such as geopolitical tension and the strengthening US dollar," he added. Agreeing with this, Dipen Shah, head-private client group research, Kotak Securities Ltd, said, “There could be volatility in the near term as the market is fairly valued." Investors should be very selective at this stage and should not get carried away by the daily movements in the market, added Shah.
The GDP data released on Friday, 29 August, was encouraging and suggests that the economic activity has bottomed out. However, a stronger recovery, which will take the rate of growth to higher levels, will depend on a variety of factors, including government action. The mood in the economy remains upbeat, which is positive for business and investor confidence.
In the stock market, the rally this year, to a large extent, has captured the developments in the broader economy and analysts are now beginning to sound cautious. However, this is not to suggest that markets cannot go up further from current levels, or that a big correction is around the corner. Since it is always difficult to time the market, investors would be better off riding the market in the short term and not trying to do too much as the possibility of gains is higher in the medium to long term
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