Indian Equity Strategy: Market at life time High
Indian equity markets made fresh life time highs
on the back of improving domestic macros, supporting global equity and expected
governance improvement in India after next general elections. Sensex crossed
the level of 21,200 after a gap of almost six years. FII have been looking at
Indian equities again with a lot of enthusiasm with more than 2.5 billion
dollars invested in the month of October.
Global markets have turned supportive of equity.
In their recent meeting, US Federal Reserve has expressed concern about the
quality of macroeconomic recovery in US and has decided to maintain the current
pace of bond buying program. This dovish stance from the Federal Reserve will
help sustain upwards bias in Emerging market equities, currencies and bonds.
The revival in global risk appetite has resulted in fresh FII inflows into emerging
market equities with India turning out to be a big beneficiary. India has been
one of the top performing equity markets since the middle of September when
Federal Reserve first announced the postponement of tapering program.
Rise in Global Equities since 18th September,
2013
The tough measures to ensure financial discipline
in the peripheral eurozone area in the last few years have began to show
results. European economies have seen rebound in growth with Spain recently
coming out of recession. We expect this macroeconomic recovery in the Euro area
to get stronger in the next few quarters.
RBI carried out the review of Indian monetary
policy last week. As expected, it carried out a 25bps increase in repo rate
along with a 25 bps cut in MSF. The corridor between repo and MSF has been
restored to 100 basis points. The liquidity provided through term repos of
7-day and 14-day tenor has been increased from 0.25% of net demand and
time liabilities (NDTL) of the banking system to 0.5% further easing short term
liquidity. With these latest steps, the extraordinary measures taken by RBI in September
to defend the rupee have been largely reversed. The trade data also reflects
significant reduction in CAD and we believe that the worst is behind us on that
front.
GDP growth in the last two quarters has remained
below 5%. Capital formation growth in the country has further with no sign of
pick-up as yet. The forecast for FY14 GDP growth has been cut from 5.5% to 5%
by RBI We believe that growth in the
next two quarters will improve due to strengthening export growth and expected
pick-up in agriculture. Also, revival of large stalled projects cleared by the
Cabinet Committee on Investment will give a boost to capital formation
activity. The worst seems to be behind us from a growth perspective and we
believe we will see a multi-year revival of the growth and earnings cycle in
next few quarters.
The political activity in the country is going to
get more and more interesting as we approach the General elections scheduled in
May. The recent opinion polls indicate support building up for Gujarat Chief Minister
Narendra Modi led National Democratic Alliance (NDA). There have been several
concerns about governance and populist schemes in the last few years and
markets are getting excited about prospects of a better government emerging
from the next election. We would expect a bigger rally building up going into
the election.
While Sensex has made fresh life time highs, the
performance of various sectors have been quite divergent. Pharma, IT and Auto
have been best performers in the last six years, while Banking, Oil & Gas,
Capital Goods and Metals have been worst performers. We expect this trend to
start to reverse going forward. With the normalization of Repo MSF corridor, we
believe RBI might pause in the immediate future. With monetary policy risk out
of the way, we have turned positive on interest rate sensitive sectors like banks
and automobiles. We expect export oriented sectors like IT to continue to
benefit from the significant rupee depreciation seen this year. Telecom is
another sector which might deliver strong earnings due to return of pricing
power & reduction in competitive intensity.
We maintain our year-end Sensex target of 22,400.
A good monsoon, strong export sector, continued monetary stimulus in US & a
stable Euro area are significant positives for equity markets. With domestic macro-economic
data also on the mend, we are aggressive buyers of Indian equity.
