Indian stocks are expected to rise another 5% by the end of the year, extending a four-year bull run, though at a much slower pace than in the previous two years, according to a Reuters poll of 14 analysts.
Analysts expect banks and telecom companies to drive the gains, while auto makers lag behind as higher interest rates slow consumption in Asia’s third largest economy.
The Bombay Stock Exchange’s main 30-share index, the Sensex, is expected to rise to 15,250 points by the end of 2007, for a 10.6% full-year gain, the median forecast of 14 India-based and European analysts showed. It is expected to rise to 16,000 points by mid-2008 from Monday’s close of 14,487.72. The index closed on Wednesday at 14,431.06.
The Indian economy has grown at an average 8.6% over the past four years, powered by rising corporate profits and attracting strong capital inflows that have boosted shares.
The Sensex gained 73% in 2003, 13% in 2004, 42% in 2005 and 47% in 2006. It is up about 5% so far in 2007.
Analysts say rising inflation, which hit a two-year high of 6.7% in January, and five interest rate increases in the past year have muted market sentiment in 2007.
However, scorching economic growth and net foreign fund inflows of $4.4 billion (Rs18,040 crore) since January have lent it support, and analysts say they expect inflation, which is now at a 14-month low of 4.3%, to remain tame.
“In our view, interest rates will stabilize and inflation will come under control, and this will ease the pressure on (the central bank) to increase interest rates,” said Amitabh Chakraborty, president for equities at Religare Securities Ltd. He said rapid economic expansion had helped banks.
In the past year, shares of State Bank of India, the country’s largest lender, have risen 88%, while ICICI Bank Ltd has gained 86%. Last week, ICICI Bank, the second largest lender, raised $4.9 billion in the country’s biggest share sale.
“The banking sector is the direct play on the economy, and when the economy is growing rapidly, the credit growth will be quite robust,” Chakraborty said. Analysts said banks were also poised for consolidation ahead of a possible new policy regime in 2009, when controls on foreign banks will be reviewed.
But India’s automobile makers are suffering as rising interest rates have hurt demand, and most of the analysts polled said the sector would continue to underperform. Bajaj Auto Ltd, Hero Honda Motors Ltd and Tata Motors Ltd have been the worst performing shares among the top 30 stocks in the Sensex in the past year.
Most analysts said the telecom sector, which in February saw Vodafone Group Plc. buy a controlling stake in India’s Hutchison Essar from Hutchison Telecommunications International Ltd would remain attractive. India is the world’s fastest-growing cellular market, adding more than six million users every month.
The top performers in the Sensex are telecom firms Bharti Airtel Ltd and Reliance Communications Ltd, which have more than doubled in the past year. “We are positive on Reliance Communications. It has a significant acquisition potential,” Chakraborty of Religare said.