Sensex rises 47% since 52-week low

Improvement in earnings, govt policies could provide more legs to the rally that started a year ago

The Indian market has rallied nearly 50 per cent in the past year. Incidentally, the 52-week low for the benchmark indices was exactly a year ago, when the 30-share BSE Sensex was at 18,071. On Thursday, the index ended at 26,638.11, up 8,567 points or 47.5 per cent since August 29, 2013.

The broader CNX NSE Nifty is at 7,954.35, up 2,850 points, or 56 per cent, from its 52-week low of 5,118.90 touched in August 2013. The market upsurge coincided with the announcement of Narendra Modi as the BJP’s prime ministerial candidate. Although blue-chips led the surge, it later spread across the market. In the past year, nearly 40 per cent companies in the BSE 500, BSE midcap and BSE smallcap indices saw their share prices double. About 200 stocks from this universe of around 780 companies, which account for the country’s 98 per cent market capitalisation, have gained between 50 per cent and 100 per cent.

Foreign institutional investors (FIIs) also turned bullish towards India and invested Rs 1,31,166 crore ($21.5 billion) during this period, data suggest. Mutual funds that remained dormant for most part of this duration, too, have assumed an aggressive stance. “Politics has also had an important influence in Turkey, Brazil, India and Indonesia. As exemplified by developments in India, the mere prospect of structural reform is a powerful driver of markets, while execution is a requirement for sustainable outperformance,” says Jose Gerardo Morales, chief investment officer, Mirae Asset Global Investments.

The total investor wealth, measured in terms of market capitalisation of all listed companies, rose by 53 per cent to about Rs 92.59-lakh crore as on date, compared to around Rs 60.32-lakh crore last year.

The road ahead
Experts suggest the markets could take a breather and consolidate before resuming their next upmove, which is likely to driven by earnings growth and rollout of favourable policies.

“Returns of Indian equities have largely been driven by earnings growth over the past 15 years. In contrast to this long-term trend, this year has witnessed a 27 per cent return of which 19 per cent is due to multiples expansion. While this could be due to raised expectations on the back of change in India's political leadership, we believe that positive earnings momentum is required to sustain these returns,” says Bhuvnesh Singh of Barclays in a recent India Equity Strategy report co-authored with Vijit Jain and Rachna Biyani.

Says Abhay Laijawala, managing director and head of research, Deutsche Equities: “Investors have begun expressing concern over the NDA government's perceived lack of urgency in articulating a timebound gameplan for big bang reform. While we agree that articulation of big bang reform is yet to come, we are seeing an urgent focus on policy execution, particularly focused on clearing stalled projects and in attempting to simplify and streamline government processes. However, investor patience may be tested if an articulation on big bang reform accompanied with a time bound gameplan is not forthcoming over next few months.”

Given the focus on reforms, analysts suggest that investors should look at cyclical and policy-oriented sectors as the next leg of growth in earnings will be mostly driven by them.

“We think an earnings pick-up could essentially be triggered by cyclical sectors, and we expect a rebound as the investment cycle in India accelerates. We recommend gaining exposure to cyclical sectors and steering clear of defensive sectors,” says Vivek R Misra, Asian equity strategist at Societe General.

He maintains a Sensex target of 25,000 for December 2014. He expects the benchmark index to touch 31,000 by December 2015 and hit 35,000 levels by December 2016.