)
Both of India’s leading stock market indices – the National Stock Exchange’s Nifty and the Bombay Stock Exchange’s Sensex – on Tuesday touched new lifetime highs, taking in their stride a battery of negative news – relatively subdued corporate numbers, worries over low crude prices, a crisis in the Euro zone, Russian interest rate troubles and the recent volatility in Switzerland.
While the benefits of a change in India’s government are yet to be seen in corporate numbers or economic data, the RBI’s interest rate cut has been the key driver in the present rally. Historically, markets have benefited from a change in interest rate cycle as money moves out from lower interest rates to equities or directly into the economy in search of higher yields.
Meanwhile buoyancy in the economy and declining interest rates have once again attracted the attention of domestic investors. Anup Maheshwari, executive vice president and head of equities at DSP Blackrock, says FY16 will see the return of retail investors in the market. He expects around $15 billion or more of domestic equity flow in the markets on an annual basis.
But fundamental numbers still have to catch up with the optimism on the Street. After interactions with its foreign clients, CLSA, one of India’s largest foreign broking firms, said they witnessed a heightened interest from global funds that are still significantly under-positioned in India. CLSA has named India as its top pick among emerging markets.
Nomura in its strategy report on India has pegged the BSE Sensex target at 33,000, a potential upside of around 20%. The broking firm says that its bullish stance is on account of improvement in India’s macro environment over the past year, which it feels is durable and can improve further. The lag effect of the much-needed complete overhaul of the political economy is a significant tailwind. The extent to which this is not yet priced in should provide upside to multiples, adding to market returns over and above earnings growth, Nomura says in its report.
While the India story still is hot, investors need to look for winners that will ride the bull market. With interest rates cycle having turned, analysts expect banks to do well. Both CLSA and Nomura have named banking stock in their top picks. For CLSA, ICICI Bank and SBI are among its top picks, Nomura names Axis Bank and Union Bank among its top five picks.
Ajay Srivastava of Dimensions Consulting in an interview with CNBC, said “The market currently is discovering new stories to take it up but banking will continue to be the driving force. The stock market theory is rested on the banking sector and no other sector is likely to take it up.”
While banks are the top favourites, broader companies focused on Indian economy are also expected to gain. Nandan Chakrabarty, managing director (institutional equity research), Axis Capital, says engineering, procurement and construction (EPC) businesses are likely to see maximum gains.
Maheshwari of DSP Blackrock said that interest rate sensitive companies are expected to gain. He further expects companies to post better profits rather than sales on account of higher operating margins which will be possible due to lower costs. Banking remains Maheshwari’s top pick, too, but he also likes consumer discretionary, Maruti and some of the longer term sectors like pharmaceuticals.
