STRONG macro fundamentals with the March quarter GDP at 7.9 per cent giving a full year GDP of 7.6 per cent has bolstered the confidence in the market to such a level that most experts are of the considered view that the Indian market has de-risked itself from most of the global headwinds, be it the Fed rate hike, the Chinese turbulence, strengthening Dollar, Brexit or whatever. Most of the macro signals are also positive for the market, including the improving corporate profitability that was probably highest since June 2014, better auto sales numbers, increased cement dispatches, increased bank lending to customers, improving savings data and so on.
Government investment is picking up and will soon be followed by pick up in private sector capex that may get re-confirmed with the monsoon predictions of above normal rainfall as predicted by most of the latest met forecasts. Economic recovery is likely to continue with urban demand picking up and good monsoon soon going to improve agriculture income that will go on to reduce rural distress and perk up rural demand.
Implementation of the Seventh Pay Commission will further boost demand for consumer goods and consumer discretionaries. A new thrust to the reform agenda by the government with the possibility of some big ticket reforms such as Bankruptcy Code and GST getting clinched may further improve the prospects of the market. Clarity on the Mauritius Treaty has also sent very bold signals to the market that the government can bite the bullet even on very contentious issues and may not follow the please-all approach.
Valuations of the Indian market appear steep, as MSCI India Index at around 22 times earnings is at a huge premium, compared to 13.5 times for the MSCI Asia Pacific ex-Japan benchmark. However, the premium valuations are to an extent justified looking at the superior returns on equity that Indian corporates are likely to demonstrate in the days to come.
The fact is that for a brief period of inflows in March-April, emerging markets have all witnessed outflows with India fairing comparatively better by witnessing the least amount of outflows. The same is likely to hold for future as well. In fact, the increasing number of quality institutional investors are getting engaged with fast emerging opportunities in India. Investors like CPPIB, GIC, ADIA and Blackstone are putting large amounts of money in India. They are representatives of the positive sentiment towards India and are playing on its long-term story.
The recent state election results have further improved the footprint of the ruling alliance giving it the much needed booster dose to go whole hog on its development and reforms agenda. However, the domestic headwinds such as the lack of boost the economy has been getting due to the falling oil prices, constrained bank lending due to rising bad loans, very high leverage in some sectors, the ongoing fiscal compression and bottoming out of inflation may play spoil sports. Even the issue of the extension of the RBI Governor’s term may play on the market.
The market may witness a correction in the near term due to too much uncertainty on the global front. Investors will do well to take it as an opportunity to pick up stocks that are likely to gain the most from the India growth story since the medium to long-term story looks excellent.
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