Reforms, Union Budget next triggers for the market

The Modi wave pushed the the S&P BSE Sensex and the CNX Nifty past the 25,000 and 7,400 levels respectively

After touching a 52-week low in August 2013, the ‘hope rally’ has seen the benchmark indices – S&P BSE Sensex and the CNX Nifty – rally 38% and 40% respectively till date.

In the process, the markets touched new highs with the S&P BSE Sensex and the CNX Nifty crossing the 25,000 and 7,400 levels respectively with the outcome of the general elections giving a clear mandate to Narendra Modi–led Bharatiya Janata Party to form the next government at the Centre.

“From a macro-economic perspective, this is a positive outcome. The strong mandate will enable the new government to be formed relatively quickly, which will help reduce political uncertainty. The mandate also gives the government the political muscle to move forward structural reforms, desperately needed to bring about a sustained recovery in growth. Given the Modi-led government's likely emphasis on enhancing infrastructure, we also expect that investment projects will be rolled out at a somewhat faster pace, which will help gradually de-bottleneck the economy,” said Leif Eskesen, chief economist for India and ASEAN, HSBC.

“On the administrative front, on the other hand, there should be scope to move things forward a bit faster. Stepping up efforts to roll out infrastructure investment projects are likely to provide a lift to the investment cycle, although we are not likely to see visible signs of that before we enter into the second half of the current fiscal year,” he adds.

The market frenzy has seen foreign institutional investors pump in nearly $15 billion in the Indian markets, making them one of the best performers among the emerging markets (EMs), especially the poll-bound ones.

As investors’ preference shifted to high beta and policy reform driven sectors, the S&P BSE Capital Goods index (up 88%), CNX PSU Bank index (up 67%), CNX Infra index (up 49%) and S&P BSE Oil & Gas index (up 36%) were some of the top performing sectors during this period.

On the other hand, S&P BSE IT index (up 13%), S&P BSE FMCG index (up 16%) and S&P BSE Healthcare index (up 20%) were the sectors that gained the least during this period.

Among individual stocks, BF Utilities, TVS Motor, CEAT, KEC international, NCC, Adani Enterprises, HCC, HDIL, IRB infrastructure, YES Bank and HPCL surged between 129 – 432%.

The next trigger

Given the up move and the fact that the markets’ wishes in terms of poll outcome have come true, how much more can they rally from here on and what is the next trigger?

Says Ravi Sundar Muthukrishnan, senior vice president and co-head (research) at ICICI Securities: “We expect the Nifty to scale 8,100 by year-end based on a forward P/E of 16.7x. Rising food prices due to El-Nino effects, sticky core inflation, slow Industrial growth and the actual performance of the government falling below expectations are the downside risks to our target.”

“Our best picks are Reliance Industries (RIL), ONGC, Larsen & Toubro (L&T), Axis Bank, Punjab National Bank (PNB), IDFC, Coal India, UltraTech Cement, Tata Motors, Maruti Suzuki, Power Grid and Oberoi Realty,” he adds.

Abhay Laijawala, managing director and head of research, Deutsche Equities India has raised his December 2014 target for the S&P BSE Sensex to 28,000 (implying a multiple of 18x on FY15 EPS) and believe that we are at the cusp of a structural bull market.

“While the budget will now emerge as the next key milestone for the market, investors should begin to assess what the next government is likely to do. With the economic turnaround and revival of manufacturing taking centre-stage we recommend investors to intensify focus on domestic cyclicals and policy improvement plays,” he says.

Adding: “Our Large-Cap top picks are Axis Bank, Bank of Baroda, Punjab National Bank, REC, L&T, Siemens, Ultratech, Powergrid, RIL, Bharat Petroleum Corporation (BPCL), Tata Steel, Maruti Suzuki, TCS and Titan. We also expect mid-caps to continue rally as a high beta play on economic improvement. Our top mid-cap picks are Apollo Tyres, CESC, Hindustan Petroleum Corporation (HPCL), Jain Irrigation, LIC Housing Finance and Shree Cement.”

“The election results 2014 are far ahead of all the exit poll expectations. It is also positive for a potential drop in interest rates over the next 18 months. Hence, it is extremely important for investors to consider investing in equities. Currently, Domestic investors are extremely under-invested in equities and we believe they should allocate to equities even today.  We believe that banking, infrastructure and mid-caps are likely to outperform the large caps, which does not mean that large caps will not be in a position to give returns,” says Sankaran Naren, CIO, ICICI Prudential AMC.