Mumbai: A surge in Indian shares, that halted trade on Monday, has stunned domestic fund managers who said the ballistic rise is unjustified and expecting immediate big bang reforms and a revival in the economy would be a mistake.
Indian shares jumped more than 17% on Monday, the first trading day after India voted to power a Congress-led government, shorn of Left allies, with a decisive mandate, on hopes of a revival in reforms and foreign investment.
That might not happen as reforms will take time and the swift rise, which lacked participation, could make foreign portfolio investors wary of entering the market now as share valuations are no longer very attractive, fund managers said.
“A rally like this seems to be suggesting that our fundamentals have improved. (It) is discounting what would be a situation 12-18 months down the line,” said Sanjay Sinha, chief executive of DBS Cholamandalam Asset Management.
“Right now, it is only expectations and hope. May be we might be pricing in far to early,” said Sameer Narayan, head of equity, Fortis Investment Management.
India’s main stock index leapt nearly 15% moments after opening on Monday, triggering a temporary trading halt, after the ruling coalition sealed a decisive victory without the help of Left parties, calming fears of political uncertainty.
The rupee climbed and benchmark bond yields fell as the win boosted hopes a strong coalition would push economic reforms in sectors such as banking, retail and insurance.
This, however, will take some time, and given the lingering global financial crisis the government would not be in a hurry to push drastic financial reforms, fund managers said.
“Actually, fundamentally speaking, things will take its own sweet time. It’s not that the government today is coming to power and tomorrow they will do some big bang reforms,” said Pankaj Tibrewal, fund manager, Principal Pnb Asset Management.
“Though markets run ahead in anticipation, after today’s move, the market will start asking: what next?,” he said.
The only change is in confidence level that should lead to a better investment climate, improved participation in share market and greater visibility of India as an investment destination, improving availability of capital at affordable rates.
But the market euphoria will not last and soon fundamentals would take the centre-stage, fund managers cautioned.
Fundamentals, though better than a few quarters earlier, remain challenging with just over a third of more than 1,500 Indian companies reporting losses for the quarter ended March 2009, according to analysts from Morgan Stanley.
Indian share valuations meanwhile have gone up sharply in the last two months -- the main index now trades at nearly 16 times its 12-month forward earnings, up from about 9.5 times in early March -- moderating their attraction.
“Can we go to 20 times? My answer is ‘No´,” Manish Bhandari, a fund manager at ING Investment Management, said.
However, it was possible to achieve 50% gain over three years and 100% over the next five years as a government lead by Manmohan Singh, who initiated reforms as finance minister in 1992, would boost domestic consumption, said Anand Shah, head of equity, Canara Robeco Asset Management.
“The direction of progress is well known, but then, what is important is the push and pace of progress has to be fast and now I think it can be safely assumed that the pace of the progress will be faster,” T.P. Raman, managing director, Sundaram BNP Paribas Asset Management added.