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A strong performance by the Bharatiya Janata Party (BJP) in the state elections in Maharashtra and Haryana – both strong economies – on Sunday combined with a set of reform measures announced by the government over the weekend lifted sentiments in Indian markets. The BSE Sensex opened with a rise of nearly 300 points. But how long can the party last? While domestic news continues to be positive, the same cannot be said about the global scenario. Falling oil prices and slowing economies in the developed world are causing investors to question how long the Indian rally can hold.
Analysts, however, feel India is a different story and probably one of the best markets to invest in the current correction. Here are five good reasons for analysts’ optimism and why they believe Indian markets are poised to go higher.
1. The recent fall in Indian and global market has been triggered by withdrawal of money from commodity driven funds. Explaining the recent correction Rishav Dev, Equity Strategist, Quant Capital says that October typically is a weak month for emerging markets. Going forward money will come back to Indian markets as November-December are very good months for FII flows in Indian markets. In a strategy report, Kotak Securities says that India is different from other emerging markets and that interest in India will continue to remain high after a potential macro-economic boost and recent reforms.
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2. Madhusudan Kela, chief investment strategist, Reliance Capital in an interview in Business Standard is very optimistic and feels that the bull market in India will last for another five years. He pointed out that there are early signs of capex cycle turning around. There is a jump in new project announcements and revival in stuck projects. He however, cautioned that meaningful recovery in real investments will take anywhere between 12-18 months. Even if global markets remain where they are India is likely to benefit from positive sentiment and decisive policies. With these factors on India's side, the up cycle should be reasonably prolonged, says Kela.
3. Slowly but surely, the government is taking positive policy measures to allay the Street’s concern about the pace of economic reforms, says the report released by Kotak Securities. The Indian government recently announced positive policy measures in the energy sector and small but important labour reforms. Nomura, in its report on labour reforms, said that the measures should improve the ease of doing business in India. However, on fuel reforms analysts feel that government has not completely met expectations. Kotak Securities says that while the new gas price is positive for upstream companies, it is not enough to incentivise significant investment in the upstream sector.
4. Inflation can be a surprise package for the markets. Kotak Securities feels that there is a downside risk to inflation projection given the slump in commodity prices and recent cuts in domestic fuel prices. A weak global economic outlook may keep commodity prices subdued to India’s benefit. However, the government is not taking chances and has re-imposed curbs on gold imports.
5. Equity markets historically have moved sharply higher with a fall in interest rates. Not only does money move out of fixed income securities to other asset class, especially equities during a falling interest rates scenario but earnings and revenues of companies also improve. In an interview with CNBC. Kela says he is very confident that over the next three years equities will outperform real estate, gold, silver and fixed income. He also feels that earning growths will give a positive surprise over the next two-three years. Against market expectation of a 15% growth, Kela feels a 20% growth is a more likely scenario, which has not been factored in by the market.
