Rising crude oil prices, trade war fears, depreciating rupee and the possibility of higher inflation amid rising interest rates have failed to dent sentiment at the bourses over the past few months. The S&P BSE Sensex has been one of the best-emerging market (EM) index thus far in the calendar year 2018 (CY18) with a rise of over 12 per cent.
The index closed hit an all-time high of 38,402 levels on Monday, August 20 in intra-day trade. It took just 16 months for the index to achieve this feat after it closed above the 30,000 mark for the first time ever on April 26, 2017.
Analysts attribute the resilience of Indian markets amid the recent EM turmoil to overall macro stability, low policy uncertainty, improving growth and domestic flows. Domestic equity flows are in the midst of a structural uptrend, they say, resulting in a persistent bid for stocks.
“India's policy environment has defied expectations and remained relatively benign despite the coming elections in 2019. Macro stability is strongly backed by a Central Bank committed to keeping real rates positive,” wrote Ridham Desai, head of India research and India equity strategist, at Morgan Stanley along with Sheela Rathi in their recent report titled India Equity Strategy Alpha Almanac: Why is India behaving differently?
The rally in select individual stocks, however, has been sharper. Leading the pack of gainers in this over 8,000-point journey has been Hindustan Lever (HUL) that has moved up nearly 89 per cent during this period, ACE Equity data shows.
Reliance Industries, Tata Consultancy Services (TCS), Infosys, Mahindra & Mahindra (M&M), Maruti Suzuki, Kotak Mahindra Bank, HDFC Bank and Tata Steel are some of the other stocks that have outperformed the markets during this period – rising 27 per cent to 74 per cent.
Morgan Stanley’s S&P BSE Sensex target for June 2019 in a bull-case scenario to which they attach a 30 per cent probability is 44,000. This, they believe, can happen if the market starts believing in a strong election result (one party has a clear majority) and earnings growth accelerates to 29 per cent in F2019 and 26 per cent in FY20.
Their base-case (50 per cent probability) and bear-case (20 per cent probability) target for the index stands at 36,000 and 26,500 respectively.
Oil prices, local fund flow and the outcome of the general elections scheduled for 2019 are the three most important factors that will drive the markets from here on, finds a UBS study. The rupee exchange rate turns out to be the least important driver, followed by bank NPL (non-performing loan) resolution.
“We believe a key local factor for Indian markets over the next three quarters will be investors' perception of will Modi win in 2019. Our discussions with investors suggest that most presume Modi will win the 2019 national election. We would remind investors to keep an eye out for opposition alliances, given the role of arithmetic vis-à-vis narrative in the context of the Indian electoral system," says Gautam Chhaochharia, head of India research at UBS in a recent co-authored report with Sanjena Dadawala.