Street re-rates India, sure Narendra Modi can kickstart growth

Written by fe Bureau | Mumbai | Updated: May 20 2014, 06:19am hrs
BSEMarkets at new highs, cash volumes highest in 3? years
With brokerages re-rating India and increasing weightages on the back of a historic win by the Narendra Modi-led BJP in the 2014 parliamentary elections, the Sensex on Monday rallied to yet another lifetime high, closing at 24,363.05 points, up 1% over Fridays close. The broader Nifty too surged to 7,263.55 points, up 0.84%, a new high. The turnover in the cash market rose to R36,267 crore, its highest level in three and a half years. Foreign institutional investors were buyers in equities for the 20th straight session.

The relentless foreign inflows in the bond and equity markets $13.5 billion so far in 2014 saw the rupee strengthen to 58.5950, after it scaled an intra-day peak of 58.3750, the strongest level since June 18, 2013. Three-month offshore non-deliverable forwards rose 0.3 % to 59.35 per dollar, according to data compiled by Bloomberg.

The BJP has won 282 seats in the 543-seat Lok Sabha, a victory that has made the Street confident the party can speed up reforms and jumpstart growth. Convinced there are several low-hanging fruit to be plucked, brokerages continue to upgrade India. The lowest hanging fruit for the next government would be to accelerate project approvals and even if half of the $150 billion projects get moving, it will have a 75-100 bps impact on GDP, CLSA said in a report. It added that while a further re-rating from here on would require earnings upgrades, that could be possible even now as current estimates do not build in aggressive growth recovery.

Bank of America Merrill Lynchs year-end target of 27,000 points for the Sensex values the market at 16.5 times, a premium to long-term averages of 14.5 times. Reform announcements and expectations of recovery will drive re-rating. If we look at the 2009 elections too, the markets traded at 16-18x for the rest of the year, the brokerage wrote in a report. BofAML, however, expects the economy and earnings to continue to be sluggish for FY15. Markets will have to look through sluggish macro data and a possible poor monsoon, it noted.

Chris Woods of CLSA in his Greed & Fear report said the continuing rally in equities will give those with extended balance sheets a chance to raise equity, be they banks or corporates. Greed & fear will add another two percentage points to the existing double overweight in India in the Asia Pacific ex-Japan relative-return portfolio by increasing the underweight in China by one percentage point and by reducing Thailand by one percentage point to neutral, Woods said.

Deutsche Bank upped its year-end target for the Sensex to 28,000, arguing that the historic election verdict justifies a re-rating of the Indian market. It pointed out that over the last decade a fragmented coalition, with differing economic ideologies, had been the key reason for the economic malaise.

Bloomberg reported that Indias currency reserves have risen by $39 billion from a three-year low in September to $314 billion, according to latest official figures, signalling the monetary authority has bought dollars.