Indian equities, already among the top performers in Asia this year, may start drawing back foreigners after the government announced a $32 billion rescue for state-owned banks weighed down by bad loans. “Foreign investors will view this very positively,” said Sageraj Bariya vice president of sales at East India Securities.
The plan “should inspire confidence in trade, industry and investors.” Overseas investors so far in October have sold a net $1 billion of Indian stocks, cutting their 2017 investment by 20 percent, following the slowest economic growth in three years.
Even so, the S&P BSE Sensex and the NSE Nifty 50 set fresh records as domestic investors plowed money into shares, shrugging off concerns about how last year’s currency ban and a new tax regime were affecting corporate profits. Earnings at NSE Nifty 50 Index members have trailed consensus forecasts for most of this decade, data compiled by Bloomberg show, prompting some fund managers to warn that valuations are too high. Growth concerns may ease after the government announced the recapitalization program late Tuesday and coupled that with a plan to spend $106 billion on roads, a bid to spur borrowing.
“This is a stimulus and the government has done its bit to kick start growth,” said Sanjiv Bhasin, executive vice president at India Infoline Ltd. “The earnings growth recovery which was supposed to happen in 24 months now can get pushed forward by a year.”
There are signs foreign funds may already coming back. Overseas investors bought a net 36 billion rupees ($556 million) of shares on Wednesday, according to provisional data from the exchanges. The purchase is the biggest single-day inflow since June 13. India’s stock market has a total value of about $2.2 trillion, according to data compiled by Bloomberg.
Morgan Stanley dubbed the bank rescue the “Indian TARP,” a reference to the U.S. Troubled Asset Relief Program set up during the financial crisis. The program could help add as much as 5 percentage points to gross domestic product, according to Goldman Sachs Group Inc. “A substantial improvement in the growth outlook is likely to be bullish equities,” Goldman analysts led by Jonathan Sequeira wrote in a note Wednesday.
Still, the banks first need to clean up their balance sheets and then post an increase in lending, according to Jefferies India Pvt. Some were concerned about the rescue itself.
“On the one hand, the money is not going to be enough,” Rajendra Wadher, director at PRB Securities, said referring to the government’s capital injection. “On the other hand, how it it going to be paid?”
For now, investors seemed to welcome the plan. The NSE Nifty PSU Bank Index, a measure of state-run lenders, surged a record 30 percent Wednesday. State Bank of India’s 28 percent surge led gains on both the Sensex and the Nifty. The Sensex rose 1.3 percent, the most since May, as both indexes closed at fresh records.
The Sensex has climbed about 31 percent in dollar terms this year, and is vying with South Korea’s benchmark for the top spot among Asia’s major markets. Both measures are beating the MSCI AC Asia Pacific Index.
“Foreign investors will return to the market soon as Nifty and Sensex continue to scale new highs,” said Jai Balasubramaniam, Singapore-based chief market technician at Cashthechaos.com. “Outperformance will get noticed and allocation will come to it.”