Investors are desperately in search of ‘hope’, as economic growth has taken a beating, inflation is eating into savings and equity markets have given no returns through the last five years. Can the situation worsen? Yes, if the next government continues the current state of inaction. Perhaps, this is why foreign investors appear to be cheering and rooting for Narendra Modi, the prime ministerial candidate of the Bharatiya Janata Party (BJP). Now, equity strategists are driven by the hope for a political change, rather than earnings and economic growth. It all started with a note by Asia-Pacific-focused brokerage CLSA. In August, CLSA strategist Chris Wood wrote, “The Indian stock market’s greatest hope is the emergence of Gujarat Chief Minister Narendra Modi as the BJP’s prime ministerial candidate.”
Soon after, brokerages began writing reams on the possibilities a new government in New Delhi could have on the economy. Tirthankar Patnaik of Religare Institutional Equities puts it aptly. “Four years of slackening growth and essentially dead markets have contributed to one of the strongest anti-incumbency waves India’s ever seen against the Centre.” Never before has India seen such unequivocal support from the investor community for political change or one candidate. It is this ‘hope’ of change that is making markets dance. So far, the buzz has largely been in commentary. But on Tuesday, Asia strategists of Goldman Sachs brought out a detailed note, upgrading India’s investment status to ‘market weight’. Goldman Sachs also cited several reasons for the change in outlook — politics, macro and micro developments. The Goldman Sachs report, authored by Timothy Moe, says: “Following a detailed set of meetings in Delhi and Mumbai, we believe it is appropriate to raise our investment stance, recognising the equity market has risen sharply from three-quarter lows.” Among the reasons the brokerage cited for the change in its stance, the foremost was optimism over political change.
Second, external pressures had moderated for now. Third, the brokerage believes there are early signs of a cyclical pick-up and structural improvement, as several government projects are progressing and coal bottlenecks easing. It has raised the EPS (earnings per share) growth forecast for 2014 from eight per cent to 11 per cent. The brokerage hopes retail redemption pressure would moderate. In his November 1 note, Prabhat Awasthi of Nomura says: “The delay in Fed’s taper plans, significant positive surprises in trade data (this has been in line with our expectations and has underpinned our overweight rate cyclicals call) and the possibility of positive surprises on the political front have reignited bullish sentiment.” However, Nomura economist Sonal Varma says Purchasing Managers’ Index readings suggest a stagflationary environment.
Though this ‘hope’ can drive speculative excesses in the market, not all are swayed. On October 22, Crédit Suisse brought out a strategy note saying three factors could combine to drive excessive speculation in the markets. One factor it cautioned against was the hope on the Narendra Modi-led National Democratic Alliance winning the 2014 elections. The note, authored by Neelkanth Mishra and Ravi Shankar, says: “The ‘hope’ (wishes translating to forecasts, in our view) of a strong 2014 verdict can make September/December quarter results meaningless. Not surprisingly, the past two weeks’ performance suggests this rally might already have started.” But Indian markets have seen similar rallies in January and September 2012, and these were sell opportunities, not an opportunity to buy stocks. Credit Suisse believes the current rally “will also end badly. But given the positioning, it could last a few weeks”.
BROKERAGES’ TAKE ON INDIAN STOCKS GOLDMAN SACHS Investment stance: Revised from underweight to marketweight Revised target: End-2014 Nifty target at 6,900, implying a 9% upside Favoured sectors: Tech, health care, energy. Stock ideas: Buy rated names, inexpensive infra mid-caps STANDARD CHARTERED SECURITIES Investment stance: Remains constructive on the Indian markets from a long-term standpoint and advocates underweight investors consider using volatility to add exposure to fundamentally strong stocks JPMORGAN Investment stance: Overweight Reason: India replaces Russia as the highest net overweight market, as MSCI India outperformed emerging markets by 8% over the past month, driven by a lack of US tapering and lower concerns over the twin deficits NOMURA Sensex target: 22,000 by the end of March 2014 Preferred sectors: Private banks among rate cyclicals; cautious on domestic growth cyclicals CRÉDIT SUISSE Investment stance: The rally is an opportunity to sell, as this is the third ‘hope’ rally where cyclicals and public sector banks rose over the past year Reason: A turnaround in these sectors is still years away. Falling earnings estimates are expected to dominate price action in the coming months