Shrugging off concerns of a possible shrinking in global liquidity following the US Federal Reserve’s decision to end its third round of quantitative easing, Indian equity markets on Thursday scaled yet another record high. Reassured that reforms would continue to be rolled out, after the governed eased rules for foreign direct investment in construction late on Wednesday, foreign institutional investors (FIIs) shopped for more than $200 million worth of stocks.
On Wednesday, the US central bank announced the closure of a third round of monetary easing (QE3) that it had begun to roll back in early December last year. The Fed also indicated that if the US economy improves faster than expected, the first rate hike could come sooner than anticipated.
As most strategists point out, after the US, India is probably the only game in town thanks to a combination of slow and steady reforms and, most important, the dramatic impact the falling price of crude oil will have on the country’s twin deficits and interest rates. As a result, Kotak Institutional Equities (KIE) projects, for instance, predicts a 12-15% pre-tax return on 10-year G-Secs over the next 12-18 months as interest rates fall in response to a collapse in inflation. “India’s improving macroeconomic parameters and gathering reforms momentum will allow the RBI adequate room to adopt a softer monetary stance,” the
brokerage wrote in a strategy note.
Indeed, while FII had slowed down on purchases over the last month — outflows since mid-September have totalled $800 million — much more money has moved out of South Korea and Taiwan which have seen outflows of $26.6 billion and $3.1 billion, respectively. India has drawn $13.4 billion in foreign flows in 2014 so far, the highest among peers.
According to JPMorgan, while foreign investors may have been undecided in the last couple of years, the trend for Indian equities seems to have changed with India’s relative attractiveness among the key emerging markets becoming better.
“The primary external support has been the sharp fall in global commodity prices. This, combined with a stable rupee and the government’s timely diesel deregulation measure, has aided inflation and the margin outlook for companies,” the foreign investment bank observed.
Taking a cue from the overnight performance of some global markets, the Sensex opened flat on Thursday but soared later in the session, hitting an intra-day high of 27,390.60 points before closing at 27,346.33, up 248.15 or 0.92%, also a lifetime high. The broader Nifty also hit a new all-time high of 8181.55 points intra-day before closing at 8169.20, up 78.75 points or 0.97%.
KIE believes a potential normalisation of US interest rates in 2015 may not have a material impact on India as the monetary programmes of the Bank of Japan and the European Central Bank to stimulate their economies may have an “offsetting” impact on global liquidity. It expects the balance sheets of G-4 central banks to expand by $1.7 trillion by the end of 2016, based on this outlook.
The price of crude oil has plunged by a fourth since the June peak of $114.80 per barrel and currently trades at $86.60. In FY15 so far, Brent has averaged $104 compared with $107.60 in FY14. BofAML estimates that every $10 per barrel decline in the price of crude oil lowers the current account deficit by 0.4% of GDP and the fiscal deficit by 0.1% of GDP.
Although the rest of the Asian markets traded with a mixed to positive bias on Thursday, India’s indices reported their highest daily gains to reaffirm India’s position of being the best performing emerging market this year with a year-to-date rally of 29%.
Construction and realty stocks led the market gains after the government eased rules for foreign investments in property development. DLF, Unitech and HDIL rallied by 5% to 8% also as IT service providers (HCL Tech, Tech Mahindra) and banks (YES Bank, IndusInd Bank) also contributed to the momentum.
Trends in inflation have moderated of late, with the benchmark CPI and WPI falling to multi-year lows in September. This has raised hopes of an earlier-than-expected rate cut by the RBI. Experts are also hopeful the government’s policy actions henceforth would accelerate.
Dinesh Thakkar, CMD, Angel Broking, believes that although there may be a fair amount of volatility going ahead due to global factors, the Indian market could generate strong returns over the next two years. However, analysts say that key policy changes are needed to revive the investment cycle.
Gopal Agarwal, CIO of Mira Asset Mutual Fund, said mining reforms and policy moves to step up infrastructure spending are key requirements for improving the investment environment.
Not tapering off
Bank of Japan and ECB will pump in liquidity even as Fed & Bank of England reduce it
Kotak Equities projects $1.7-tn rise in G4 central bank balance sheets by end of 2016
Collapsing crude will fix India’s twin deficits, makes India more attractive for FII equity flows
Kotak projects 12-15% pre-tax returns on 10-year G-Secs over 12-18 months due to fall in inflation and hence interest rates; 20-25% return on equity over 18 months — hence FII flows unlikely to be hit