Concerns about corporate earnings appear to have been brushed aside for the moment in the hope that a stable and efficient government will jumpstart growth. The shift in their mood is seen in the data — while FIIs were sellers in January and most of February, the last 16 sessions have seen them buy stocks worth $1 billion. India is beginning to see bigger inflows than its peers and in the week to February 26, saw inflows of $259 million, the third highest among key emerging and developed Asian markets. FIIs have been bullish on the bond markets for a couple of months now, having snapped up close to $5 billion of short-term paper. The inflows have helped the rupee recover smartly — on Thursday the Indian currency closed at 61.12 to the dollar, a three-month high.
At Thursday’s levels, the Indian market isn’t cheap even if it’s not overly expensive. The Sensex, which has been trading below its average historic valuations for the most part of last two years, is now within a whisker of the nine-year average one-year forward multiple of 16.1 times. Bloomberg data show India is now trading at a multiple of 15.9 times or at their highest valuations, relative to their EM counterparts, since February 2011.
India’s CAD for the quarter ended December fell to 0.9% of GDP or $4.2 billion, from 6.5% a year earlier. “It’s a combination of factors that has pushed the market higher. We are in the midst of a pre-election rally and the CAD data too has been supportive,” Andrew Holland, CEO, Ambit Investment Advisory, said.
“Investors seem to be looking at the best case scenario and are betting on a stable government that will give reforms a push,” Holland of Ambit Investment Advisory said.
Recent opinion polls suggest that the BJP-led NDA alliance is gaining momentum and is poised to get close to the ‘magic number’ of 272. The recent buying streak by FIIs is their longest since the start of November 2013. FIIs net bought $208 million of Indian shares in the cash segment on Thursday, the biggest single-day purchase since December 19.
The pre-election euphoria apart, there’s also some hope the economy may be bottoming out. A report by HSBC India shows revenue growth of the MSCI India Index companies inched up for the second consecutive quarter in December 2013, after touching 4% in March 2013, the lowest level since 2010. The HSBC Purchasing Managers’ Index (PMI) for the manufacturing sector had touched a one-year high of 52.5 in February, indicating the worst may have been over for India Inc.
“There are some positive events and expectations of better growth in India will prevail over the negative developments globally,” Raamdeo Agrawal, joint MD and co-founder, Motilal Oswal Financial Services, told FE.
Brokerage BNP Paribas observed that just a few months ago, the Indian economy was plagued by headwinds of high inflation, high CAD and political uncertainty. “Till September 2013, the INR (rupee) was the worst performing currency among the ‘fragile five’. However, the actions of policymakers since then have helped the currency regain investor credibility, and tight curbs on gold imports coupled with improved merchandise and service exports sharply reduced the current account deficit,” the report said.
The BSE Sensex is now among the best performing market this year; the Sensex had returned 3% in US dollar terms, beating those from China's Shanghai Composite (-3.7%), the Taiwan Taiex (-0.3%), South Korea's Kospi (-2.9%) and Brazil's Bovespa (-7.9%). Foreign brokerage Deutsche Bank has set a Sensex target of 24,000 for December 2014, at which Sensex will trade at 15.8 times FY15 EPS, in line with average of past five years.
Global cues remained positive on Thursday despite the undercurrent of tension between Russia and Ukraine. While Asian markets were up anywhere between 0.22% and 1.59%, the major European indices, the FTSE 100, DAX and the CAC, were also trading up anywhere between 0.24% and 0.61% at about 5.00 pm IST.