For India’s most accurate equity forecaster, the best monsoon since 2007 is a reason to be bullish on the country’s stocks for a third successive year.
Rakesh Arora, the head of research at Macquarie Group Ltd. in Mumbai, says the S&P BSE Sensex will advance 13 percent in 2014. The average of eight analysts’ predictions compiled by Bloomberg is for a 9.5 percent gain. It climbed 9.1 percent this year through Dec. 27 after rising 26 percent in 2012.
Indian equities have beaten stocks in Brazil, Russia and China in 2013 as the economy of the world’s second-most populous country rebounded from the slowest growth in four years. Monsoon rains that are a boost to farmers are adding to a recovery in investor confidence fueled by a jump in exports, speculation next year’s national elections will usher in a more stable government and a halt to interest-rate increases.
“The optimism comes from the fact that GDP estimates are being upgraded because exports are picking up and good monsoon rains will translate into better rural demand,” Arora, 44, said in a Dec. 19 phone interview. “Three months ago, everyone was cutting GDP to below 4 percent.”
India received 37 inches of rain in the annual wet season that extends from June 1 to Sept. 30, the most in six years, according to the nation’s weather office. Food-grain output in the 2013-2014 season may climb to a record, Agriculture Minister Sharad Pawar said in September.
Bigger harvests and the government’s $77 billion funding for rural areas have given the inhabitants of India’s 600,000 villages money to spend on goods other than daily staples, making them a target for consumer companies such as Nestle India Ltd. The Congress-led alliance will “fast-track” 255 projects worth 10 trillion rupees ($162 billion), Cabinet Secretary Ajit Kumar Seth said in New Delhi on Dec. 20.
“A good monsoon, higher exports and the government clearing some big infrastructure projects will push growth up,” Gaurav Mehta, a strategist at Ambit Capital Pvt., said by phone from Mumbai. “There’s still a big portion of the economy that is healthy.” Mehta said Ambit is “reviewing” its Sensex target of 21,000 for the financial year ending March 2014.
The 30-member Sensex slipped 0.2 percent to 21,143.01 today. Arora’s October prediction for the gauge to reach 20,700 by year-end matched a forecast by IDFC Securities Ltd., making them the most accurate of the 11 analysts surveyed by Bloomberg that month. Arora expects the index to climb to 23,900 by end of next year. IDFC Securities didn’t participate in the survey for 2014.
Gauges for the other largest emerging markets, known as the BRICs, have trailed the Sensex this year. Brazil’s Ibovespa Index slumped 16 percent, China’s Shanghai Composite Index slid 7.4 percent and Russia’s Micex Index rose 1.3 percent.
Indian stocks including New Delhi-based Jindal Steel & Power Ltd., which has slumped 42 percent this year, are best placed to benefit as economic growth accelerates, according to Arora. ICICI Bank Ltd. and Axis Bank Ltd. are his top picks among financial-services companies. The lenders trade at less than twice their book value, compared with 4.4 times for HDFC Bank Ltd., the nation’s biggest lender by market value. Axis Bank replaced Jindal Steel in the Sensex on Dec. 23.
Gross domestic product grew 4.8 percent in the three months ended September from a year earlier, compared with 4.4 percent in the previous quarter, official data showed Nov. 29.
The economy will expand 5 percent in the year ending March 31, the same pace as the last financial year, which was the weakest in a decade, the Reserve Bank said Oct. 29. It may quicken to 5.4 percent in the year to March 2015, according to Macquarie.
Reserve Bank of India Governor Raghuram Rajan opted Dec. 18 not to raise interest rates after increasing borrowing costs twice since taking charge of the central bank in September to help curb the highest inflation rate in Asia.
India’s rupee has rebounded 11 percent versus the dollar since sliding to a record in August after the U.S. Federal Reserve first flagged it was preparing to curb the bond-purchase program that has stoked demand for emerging-markets assets.
Wholesale prices rose 7.5 percent in November, the fastest pace in 14 months, and consumer prices climbed 11.2 percent, the most in statistics going back to January 2012, government data showed this month.
“I’m worried unless inflation comes off there won’t be a big jump in the market,” Tirthankar Patnaik, a strategist at Religare Capital Markets Ltd. in Mumbai, said an interview on Dec. 19. “Inflation will remain high and interest rates won’t come off until September.” The Sensex may end 2014 at 21,000, he said.
Indian stocks have also benefited from the Fed’s stimulus program, which spurred foreign investors to pour $19.85 billion into the nation’s $1.1 trillion market this year, the biggest inflow in Asia after Japan, data compiled by Bloomberg show. Net purchases in 2012 were $24.6 billion.
“The money has come on the hope that we are bottoming out and can start to ebb if we are unable to turn around the economy quickly or if inflation remains stubbornly sticky or we get a fragile coalition,” Jitendra Sriram, director and head of research at HSBC Securities & Capital Markets (India) Pvt. in Mumbai, said on Bloomberg TV India Dec. 24. “We are vulnerable from a capital flows perspective.” HSBC has a Sensex target of 21,750 for end-2014, he said.
Inflows reached a record $29.3 billion in 2010, making the Sensex the top performer among the world’s biggest markets that year. The largest-ever outflow, during the global financial crisis in 2008, led to the biggest annual slump in the gauge of 52 percent.
This year’s gain in the Sensex has pushed up its valuation to 13.6 times projected profit for the next 12 months, compared with the five-year average of 14.3 times and 10.5 times for the MSCI Emerging Markets Index, data compiled by Bloomberg show. The Ibovespa trades at 10.4 times, a 24 percent discount versus the Sensex. The Micex Index is valued at 4.5 times and China’s Shanghai Composite Index at 8.1 times, the data show.
“If you could get a turn in the cycle, and that’s what we think could happen, the market goes into a higher valuation zone initially,” Jyotivardhan Jaipuria, the head of India research at Bank of America Corp. in Mumbai, said in a Bloomberg TV India interview on Dec 23. “We’re calling for a slight re-rating of the market and that’s linked to the fact that the future will be much better.” He expects the Sensex to end 2014 at 23,500.
Some of this year’s best-performing stocks have risen to records. Sun Pharmaceutical Industries Ltd., India’s largest drugmaker by market value, has surged 56 percent and trades at 22 times estimated profit for the next 12 months. Software exporter Tata Consultancy Services Ltd., the biggest gainer on the gauge, with a 72 percent rally, is valued at 20.1 times, according to data compiled by Bloomberg.
India’s top three software-services exporters, which get more than 90 percent of their sales from abroad, are among the four best performers on the Sensex in 2013, benefiting as the falling rupee makes their products cheaper to buyers in the developed markets of Europe and North America.
“The U.S. is doing well and Europe is stabilizing, thus markets for software companies will do well,” Jaipuria said.
The Sensex rose to an all-time high on Dec. 9 after the opposition Bharatiya Janata Party secured the most seats in four of five state polls, a prelude to next year’s elections. Investors are optimistic that Narendra Modi, the BJP’s choice for prime minister, will be able to fast-track projects in a nation ranked bottom among the four largest emerging markets in the World Bank’s 2013 Ease of Doing Business Index.
Modi’s home state of Gujarat has recorded annual growth of 10 percent, lured investments by companies from Ford Motor Co. to the Tata Group and raised electricity-generation capacity more than fivefold since he became chief minister in 2001.
The Sensex may surpass Macquarie’s target if either the Congress or the BJP get a “clear mandate,” Arora said.