FDI optimism, Goldman Sachs upgrade buoy mkt sentiment

Written by fe Bureau | Mumbai/New Delhi | Updated: Nov 30 2012, 13:01pm hrs
Buoyed by strong global cues as also positive news flow on the political front, Indian equities rallied smartly on Thursday with the benchmark Sensex crossing the psychological 19,000-point mark to close at its highest level in 19 months.

Foreign brokerage Goldman Sachs upgraded Indian stocks to overweight from market-weight, setting a December 2013 target of 6,600 points for the 50-share Nifty index, a 13% upside from current levels. The brokerage cited growth recovery and inflation moderation for its revised target. Earlier this week, Morgan Stanley set a probability-weighted target of 23,069 points for the Sensex for December 2013, implying a 26% upside, citing a steady recovery in broad earnings growth.

Foreign institutional investors continue to shop for Indian equities; with Tuesdays purchases of $288 million, they have now bought stocks worth more than $19.7 billion so far in 2012, the largest amount in Asia this year. India remains among the best performing markets this year with the Sensex having posted dollar returns of 20.1 %, way above the 6.3% gained by Indonesia and 10.5% clocked by Taiwan. The Shanghai Composite has lost 9.7%.

Asian stocks also rallied on Thursday on optimism that the US would reach a budget deal before the end of the year to avoid a fiscal crisis. The Nikkei 225 and the Hang Seng indices each rose by 0.99%, while the Kospi and Straits Times indices rose by more than 1% each. The only index to buck the trend was the Shanghai Composite, which dipped by 0.51%.

What enthused the market is principally the resolution on Thursday of the gridlock in Parliament over foreign direct investment (FDI) in retail, after the presiding officers of both Houses allowed discussion on the issue under rules that entail voting. This revived hopes that the government might be able to get parliamentary assent for at least some of the key reform Bills during this session.

After the impasse ended, the House started transacting business the Lok Sabha later in the day approved a Bill expanding the definition of money laundering offences. With just 16 days remaining of the winter session, the government is expected to push the insurance and pension Bills meant to boost the financial sector and other economic and governance reforms that need legislative backing like the Direct Taxes Code, the land Bill and the lokpal Bill.

While the Lok Sabha will discuss retail FDI on December 4 and 5 followed by voting on the second day, the Rajya Sabha is yet to announce the schedule of the debate. Although the voting is only of symbolic value and cannot legally bar the government from going ahead with its decision to allow foreign retail biggies to pick up stakes of up to 51% in multi-brand retail operations, an Opposition win would still be deeply embarrassing for the ruling coalition. While the government is fairly comfortably placed in the Lower House, it is is a bit jittery over the numbers in the Upper House. In the Rajya Sabha, with an effective strength of 244, the UPA has only 94 members and will have to rely on the 10 nominated members, besides the BSPs 15 members and the SPs 9.

To its chagrin, the SP kept everyone guessing on Thursday on its strategy for the vote in the Upper House. The government expects the party, firmly opposed to the FDI decision, to abstain from voting.

The UPA has the support of 265 MPs in the Lok Sabha, which has a total strength of 545. With the support of the SP (22) and BSP (21), it is expected to get more than 300 votes when the motion on FDI is taken for vote. The UPA needs 273 votes to win the vote on FDI.

In September, the government had unleashed a wave of big-ticket reforms, hiking the price of diesel by Rs 5 per litre, capping the supply of subsidised liquefied petroleum gas and allowing foreign supermarket chains to enter the country.

The global situation looks less worrisome at the moment and there is hope that the US fiscal cliff will be averted. There is also confidence now that the Indian government may have the numbers to get the vote on FDI in retail, said Andrew Holland, CEO, Investment Advisory, Ambit Capital, citing the reasons for the upbeat mood in the markets.

The 30-share BSE Sensex rose 328 points or 1.75% to close at 19,170, while the broader 50-share Nifty rose 1.7% or 97.5 points to 5,825. Both the benchmark indices are up more than 11% in the last three months on hopes of policy reforms and receding global woes. Despite the uptick, the BSE Sensex is currently trading at 16 times its FY13 earnings, which is in line with its long-term averages.

The story was similar for European indices, which opened strong on Thursday. The FTSE and DAX were up 0.87% and 0.70%, respectively, while the CAC 40 was up more about 1% late evening India time.