Nov 09 2012 , Mumbai
Bulls to rule new Samvat: brokerages
The Indian stock market has seen sings of a strong bull run developing since the government announcement of reforms in September. With a revival of sentiment and a big rally across the board, all hope was pinned on a huge bang just before Diwali.
It did not quite happen that way, and the mood has turned a tad sombre after the initial enthusiasm. In marketspeak, the market today is cautious and marginally positive. But hope is never a diehard commodity on the stock market. If the big bang has bypassed us this time, there is always a next time, and a next Diwali.
Never mind the cautious to marginally positive market today, a straw poll of 10 Indian brokerages conducted by Financial Chronicle indicates that mostly fingers are crossed on Diwali 2013 seeing Sensex at or beyond 21,150 points, with some ho-hums and some ifs and buts marking an undercurrent of hope.
We did a similar poll just before last Diwali. That poll forecast Sensex to be somewhere between 19,100 and 21,000 by this Diwali. A year ago, most brokerages were bullish despite the clouds over global and local economic environment. Only two brokerages said they were bearish and it seems they will be proved right. Sensex did climb to 19,000 early in October but failed to hold the level.
In the whole of October Sensex lost one per cent; a loss it has more than made up by gaining one per cent in the first seven trading sessions this month. In the past decade, Sensex was lower year-on-year on just three Diwalis, and logged robust gains in the remaining years.
The question we posed: will the present positive mood continue and will Sensex top is its all-time high 21,207 points touched in early 2008 by Diwali 2013?
Shrikant Chouhan, technical research head of Kotak Securities, says, why, it can cross even 22,500, and gives this explanation: “We are of the view that before the outcome of the major event of the ‘winter session’ it is difficult to guess what the index will be in next 12 months. We feel that the currency of the trend will shape up in our favour if FDI gets an approval. If it doesn’t then (for Nifty) to cross 6,300 will be difficult. But if we take a call based on current formations, then certainly, we can expect 6,600/22,500 (the latter for Sensex) as a highest level during the next 12 months. On the downside 5,400/18,000 should be the barrier for the market.”
This is marketspeak and it could mean either a yes or a no to our specific question.
Not all the brokers agree that 2013 will mark the beginning of a new bull rally; yet most of them appear confident that next year will be more upbeat for equities, especially, after the government was seen to be have shrugged off its earlier coyness in getting reforms rolling again. Some hope is pinned also on RBI helping out by lowering policy rates to give a leg up to growth.
Some of the brokers predict Sensex to go above the 2008 high by next Diwali, which indicates a 10-15 per cent increase from its current level.
Prasanth Prabhakaran, retail broking president of IIFL, believes Nifty can touch 6,300 and Sensex 20,000-21,000 in 12 months on back of continued and strong FII inflows stemming from open-ended quantitative easing (QE3) and Fed’s promise of low interest rates till 2015. “Plus RBI is expected to cut rates and there are hopes of more reforms from the Indian government,” he said.
Dinesh Thakkar, Angel Broking CMD, is among those who expect Sensex to touch 20,300 in 12 months, but before that it will hit an all-time high between April and Diwali, said Thakkar.
His rationale is that recent reforms coupled with better global liquidity flows have brought about a change in market sentiments. FIIs have been bullish on the Indian market and Thakkar expects the inflows to continue.
Further policy measures will strengthen investor sentiment because, Thakkar explains, the market has time and again taken the lead and react positively much before things on the ground start moving.
The Indian market is now trading at a P/E (price-to-earnings) of 14 times, and analysts expect this to go up to 25 before peaking out.
Rikesh Parikh, VP for markets strategy and equities at Motilal Oswal Financial Services, said, “Our Sensex EPS estimate for 2013-14 is Rs 1,402, if we take the 10-year average forward P/E of Sensex, it has traded at 14.8. We can expect the market to trade close to 20,750.”
Ace investor Rakesh Jhunjhunwala is on record that the market would eventually rise sharply. He told an investor conference recently that the ‘mother of all bull run’ was ahead of us. But before that he expected a ‘deep correction’, or a prolonged bear phase, in commodities such as oil.
“We had so much pessimism (in Indian stocks and economy) during June-July. Equity was a bad word and there was extreme pessimism. There was no faith in equity,” Jhunjhunwala told the conference, pointing out that the seeds of a bull market were sown at times of extreme fear.
That fear was palpable till September and Sensex behaved in a rather erratic way as the New Year began: it gained over nine per cent in the first two months, lost seven per cent in the next two months as optimism turned into pessimism over policy logjam and retro-tax proposals. Since mid-September it has been another uplifting story.
The prognosis of those who say the market will surge is predicated on a key parameter: foreign fund inflows which are expected to remain buoyant. So far this year FIIs have infused close to Rs 94,000 crore ($19 billion) as the crisis in Europe lingered and China and other Bric nations saw a slowdown. This was an opportunity for overseas investors to pump in funds in the hope of the reforms pick-up and softening interest rates could sweeten the India prospect.
Fund inflows accelerated particularly after a government-appointed committee decided in October to defer general anti-avoidance rule (GAAR) by a few years. It is also a proof of the dread that GAAR is for foreign investors.
With GAAR out of the way for now, foreign investors are flooding the Indian market with cash, thanks also to low interest rates in the US and Europe. If anything, a further appreciation in the rupee will be welcome development for the stock market.
Another booster is reforms, some of which have come since mid-September, and more are on their way. When the fruits of some of the reforms already announced -- FDI in multi-brand retail and aviation -- start flowing, things can only look up for the market.
Indian banks hugely on foreign fund inflows to put its fiscal house in order. “Therefore, long-term FDI flows are extremely important, and we expect that will start happening next year onwards,” said G Chokkalingam, ED and CIO of Centrum Wealth Management.
A report by Bank of America Merrill Lynch in October, which co-hosted an FII interaction with the finance minister, said the government was already looking at resolving bottlenecks in 89 large projects and is also encouraging state-owned companies to invest. “The finance minister hopes to see investments improving from the fourth quarter this year,” the report said.
Fingers are, however, crossed on the various agendas of the government that have an effect on the market. One of them is goods and services tax (GST), though the finance minister said the government was confident that there would be a consensus on GST to operate it by the April 1, 2013, deadline.
Expectations are rising about policy rate cuts too. The market expects RBI to cut interest rates because, the market believes, growth has to be stimulated, and the fiscal and current account deficits and sedate tax revenues have to be tackled.
In April RBI cut the repo rate by 50 basis points to eight per cent; the market had expected only a 25 basis point cut. But RBI maintained status quo in last week’s credit policy, citing challenges on the inflation front. Before this, inflation had forced RBI to raise benchmark rates 13 times between March 2010 and October 2011.
However, the silver lining is that RBI also indicated a reasonable likelihood of further policy easing in the fourth quarter.
A policy rate cut and stable global conditions will be a positive. And the government pushing reforms aggressively will be another which will re-rate India globally, according to A K Prabhakar of Anand Rathi Securities.
A broad opinion that emerges is that the stock market will stay firm next year and investors will look for stocks and sectors they can put their money in.
Over the past five years the vagaries of the market have obliged investors to diversify their investments: they have put money in debt instruments, real estate, gold and several more.
The rally this year is broadbased and comes mainly from sectors like FMCG, cement, IT, automobiles and private banking, all of which have seen buyers.
Come 2013, this sectoral centricity of the rally may change but only somewhat, say market experts. Taking into account the slowdown in the domestic economy, high inflation, a benign interest rate regime and global uncertainty, brokers seem inclined to not giving more than a passing glance to infrastructure, construction, realty, metals and capital goods stocks. On the other hand, they may put their bets on stocks of private banks, IT, auto and auto ancillaries, pharmaceutical and FMCG firms. These could lead the not-so-distant rise of the stock market.
According to Prabhakar of Anand Rathi Securities, sectors such as agriculture, fertiliser and agricultural commodities would do well and metals could recover from January onwards. Also, a pick-up in construction amid hopes of softening interest rates will keep demand strong for cement companies.
However, Chouhan of Kotak Securities feels pharmaceutical stocks may come under pressure, but sees sentiment improving for power and paper stocks.
On the other hand Thakkar of Angel Broking is confident about the prospects of mid-cap stocks in the next leg of rally. “Export sectors are also bound to benefit from the rupee’s sharp depreciation in the past year and so even after the good performance of most stocks in these sectors, I selectively recommend stocks in IT and pharmaceuticals that are still reasonably valued. Other than that, with several Sensex companies already decently valued, I do believe that the next leg of the rally is expected to be much stronger in mid-caps,” he said.
As a matter of warning, brokers highlight risks that investors should be aware of, among them macro-economic risks, arising out of the current account and fiscal deficits. These will remain a key concern.
Alex Mathews, research head of Geojit BNP Paribas Financial Services, sees inflation as a big concern. “If inflation remains high, RBI may not cut rates. Then, to contain fiscal deficit, the government may put more stringent expenditure-monitoring measures and even make a 10 per cent cut in non-plan expenditure and slash subsides,” he said.
On the global front, brokers warn that the slowdown in China, high crude prices and debt problems of several European countries, if not tackled properly, could be a deadly cocktail for markets.
Sonam Udasi, research head of IDBI Capital, said, “Early elections are ruled out, but if China rebounds and starts growing at a healthy rate, it will trigger a rally in commodity prices and hurt India’s interest. Further, if the fiscal situation at home does not improve by March, there could be some problems.”
All the worries notwithstanding, the brokerages are bullish about the year ahead. Will investors also remain bullish? Only Samvat 2069 can tell.