Markets set for biggest six-month rally since 2009

Mumbai: Indian stocks are set for the biggest six-month rally in four-and-a-half years as foreign portfolio investors continued to pour in funds and local retail investors show early signs of interest after dumping shares for years, disillusioned with losses or paltry returns.

Further gains, though, may hinge on the ability of the new National Democratic Alliance (NDA) government to introduce reforms and take measures to quicken the pace of economic expansion in the budget to presented by finance minister Arun Jaitley on 10 July, analysts said.

The 30-share BSE S&P Sensex has gained 18.6% this year, with one session to go for the half-yearly close. The National Stock Exchange’s 50-share Nifty has climbed 19.1% during the same period. This will be the Sensex’s best half-yearly gain since the second half of 2009, when it gained 20.5%.

Some stocks have gained more.

Stock prices surged on investor optimism that the new Narendra Modi-led government would take decisive action to try and turn around the economy, which has seen sub-5% growth for two consecutive years now. On 16 May, the Bharatiya Janata Party (BJP)-led coalition secured the biggest election win in 30 years, ousting the Congress party-led United progressive Alliance government.

“Greed & Fear would advise an overweight in emerging markets for those investors who have the capability or investment style to go substantially overweight India,” Christopher Wood, an equity strategist at CLSA Asia-Pacific Markets said in his newsletter Greed & Fear on 26 June, adding India accounts for 39% of its long-only Asia ex-Japan thematic portfolio. “This is because Greed & Fear is convinced that Prime Minister Narendra Modi will be single-mindedly focused on creating the conditions for a new investment cycle.”

During the first six months of this year, 17 of the 30 Sensex stocks and 192 of BSE-500 stocks have hit new highs.

Among sectoral indices, the BSE Capital Goods Index and the BSE Consumer Durable Index have gained the most, adding 54.5% and 52.3%, respectively. Barring the BSE FMCG Index, the BSE IT Index and the BSE Healthcare Index, all sectoral indices are up by more than 25% year to date.

The gains have been backed by strong buying by foreign institutional investors (FIIs), who have pumped in a net of $9.9 billion in Indian equities so far this year.

However, these flows have been dwindling of late, and they have been net sellers in five of the last 10 sessions to 26 June, data from Securities and Exchange Board of India showed.

In June so far, FIIs have invested a net of $1.8 billion in Indian equities after a strong $2.8 billion infusion in May, as investors choose to stay on the sidelines ahead of the Union budget on 10 July.

“We advise clients to follow a ‘trust but verify’ approach on the structural reform agenda to be rolled out under the country’s new leadership looking in particular at the upcoming budget,” Morgan Stanley analysts Jonathan F. Garner and Yinan Zhang said in a 26 June note, adding that the history of other EM (emerging markets) elections, as well as current relative valuations and positioning suggest that India is unlikely to enjoy further sustained outperformance versus other EMs.

“In the short term, the prospects for Indian equities are linked to policy action by the Modi administration. The market has priced meaningful reforms by Modi. Every indication that he might not be able to live up to the high expectations is likely to push the market lower,” said Maarten-Jan Bakkum, an emerging market strategist at ING Investment Management International in an email from the Hague, Netherlands.

“After the strong rally of the past months, the immediate upside potential seems low,” added Bakkum.

More specifically, investors are looking to the government to lay down a road map to kickstart investments in the economy, while also keeping the fiscal deficit in check. Asset sales and taxation reform are other issues that investors are watching.

“In my view, it will be important for India’s new leaders to establish a clear tax foundation so investors can make plans,” Mark Mobius, executive chairman of Templeton Emerging Markets Group at Franklin Templeton Investments, said on the social networking site Twitter on 22 June. “I think Narendra Modi’s success could lie in encouraging capital investment in India, furthered by the settlement of major tax disputes.”

While FIIs have bought heavily in the first half of the year, domestic institutional investors (DIIs) continue to be net sellers and have sold a net of ₹ 30,814.6 crore since the start of the year. The pace of selling, though, has slowed. DIIs have offloaded ₹ 4,423.7 crore, down from ₹ 4,818.7 crore in May and ₹ 7,264.69 crore in April.

Some early indications of the return of domestic investors was also visible in the inflows received by equity mutual funds. In the month of May, equity funds saw net inflows of over ₹ 2,000 crore.

Meanwhile, the average daily turnover on the markets has risen by close to 70% in the period since 16 May, over figures recorded from 1 January to 15 May.

“We have seen some increase in participation from DIIs and retail investors, and I believe it will continue. Budget will be a crucial factor to watch,” Vaibhav Sanghavi, managing director, Ambit Investment Advisors Pvt. Ltd.

“For the market to sustain the strong rally it has seen in the first half, we will have to see stronger interest from DIIs and retail investors,” Sanghavi said.