Ever since the government shunned its lethargy to announce some bold policy measures a fortnight ago, the equity markets have made significant headways with the Sensex rising nearly 1,000 points.
However, market players believe that policy movements stalled over the past few years have given a new dimension to overall sentiments, and hope that the mood will remain upbeat in the near-to-medium term as fundamentals improve. The decision to allow higher foreign direct investment in aviation and retail sectors, besides increasing diesel prices and partially lifting subsidy on LPG, has triggered optimism among investors, especially FIIs.
G Chokkalingam, ED & CIO, Centrum Wealth Management, said, “I believe the rally will sustain because there is a fundamental conviction which is driving markets. The opening up of foreign investments has set the tone. In valuation terms, Sensex PE (price-earnings) is trading at just 18 times compared with 28 times the index had commanded at the peak of 2007. The government is likely to keep up the pace of reforms, with banking amendments and insurance bill coming up next. India is a unique market and FDI in aviation and retail would provide a big boost to sentiments. We expect the rupee to appreciate up to 52 against the dollar by December and to 45 in the next one year. This will boost foreign fund inflows in a big way.”
“The Trinamool Congress leaving the government has been a blessing in disguise for the markets. Now the government can push ahead with its reform initiatives. With either the BSP or the SP providing support to the UPA government, it should be possible for the centre to proceed with reforms,” Chokkalingam said.
Foreign investors have pumped in over Rs 18,000 crore into local equities in September, helping Sensex to rise nearly 8 per cent. So far, the Sensex has surged 21 per cent this calendar, boosted by foreign fund inflows of Rs 81,700 crore, or nearly $16 billion. Going by the statistics, Sensex has given positive returns in October in five of the past 10 years (see chart). Last year, the bellwether index rose nearly eight per cent in October, holding out hope that the trend would continue this October as well.
Kishor Ostwal, CMD of CNI Research, said, “The markets will rally despite the government’s not-so-impressive performance on the reforms front. They have not addressed the fiscal slippage issue. The market was oversold and hence we saw a big rally. We expect small profit-booking before Nifty rebounds thereafter. We expect Nifty to reach 5,800 in October.”
Following the announcement of the reform measures, several foreign brokerages upgraded the Sensex target for the year. Buoyed by the back-to-back announcements on fuel price hike and relaxing FDI norms for retail, aviation, power exchanges and broadcasting services, Citibank increased its Sensex target to 19,900 from 18,400 earlier, while Deutsche Bank forecast that the index would reach the 20,000 level by calendar end instead of its targeted 18,000 level at the start of the year.
Morgan Stanley has raised its Sensex target for December 2013 to 23,069. BNP Paribas has indicated the revival in domestic animal spirits coupled with likely increase in global liquidity on the back of quantitative easing by the US Fed Reserve has priced out the risks faced by India over the next six-twelve months, thereby justifying the jump in equities and currency. Citi report said the recent reforms announcement would perk up market sentiments while a mix of fairly real policy changes and global liquidity (QE3) should push Sensex higher by two to three per cent in the immediate term.
“We expect the index to continue with its tendency of 50 per cent retracement of each up-leg. The support region of 18,250-18,000 is likely to act as a launch pad for further upward rally. The next up-leg is expected to take the index towards 19,500-19,800 being the 78.6 per cent retracement of the entire decline from November 2010 high of 21,108 to December 2011 low of 15,135,” ICICIdirect said in its report.
Market men also reckon the recent steps taken by the government to restructure the financials of state electricity boards should augur well for the power sector in the medium-to-long term. Further, with State Bank of India taking the lead and slashing interest rates, there was hope that the high interest rate regime could be bottoming out. “One can expect other banks to follow soon in paring down lending rates,” Chokkalingam said. Lower interest rates would kickstart the investment climate and provide a leg-up to earnings over the next four-five quarters.
The equities market will also take cues from September quarter earnings set to be announced from this month. There will not be any major disappointments in earnings and one may expect 10-11 per cent sequential growth in the July-September quarterly earnings, Chokkalingam said. Crisil Research in its report has indicated a 20-40 basis points expansion in Ebitda margins year-on-year in the forthcoming July-September earnings.
Its study has highlighted that Ebitda margins are bottoming out after falling for the past nine quarters, as softening commodity prices and higher realisations for export-centric companies amid falling rupee would aid margins. Companies representing cement, power, steel, tyres and textiles were expected to benefit from a sharp decline in commodities such as coal, rubber and cotton, while the rupee depreciation would continue to boost margins of IT services and pharmaceuticals sectors, the Crisil report said
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