Stock investors who missed this year’s 20 percent rally in the S&P BSE Sensex Index will get a chance to buy at cheaper levels in the next two months, according to BlackRock Inc.’s India joint venture.
The Sensex, the top performer among the world’s 10 biggest markets in 2014, will probably drop as much as 10 percent by the end of September as conflicts in Ukraine and the Middle East curb investor demand for riskier assets, said S. Naganath, chief investment officer of DSP BlackRock Investment Managers Pvt. The gauge may then rally 25 percent by April 2015 as India’s accelerating economy lures back investors, he said.
While the MSCI All-Country World Index has dropped 4.5 percent from this year’s high on July 3, the Sensex lost just 1.9 percent amid speculation Prime Minister Narendra Modi will follow through on pledges to revive economic growth after winning the nation’s biggest electoral victory in 30 years in May. The Sensex has gone 351 calendar days without a 10 percent retreat, three times longer than average during the past decade, as foreign investors bought a net $20 billion of shares.
“The biggest concern in the very near term is the risk of geopolitical tensions,” Naganath, 50, who oversees about $7.6 billion, said in an interview yesterday in Mumbai. “We won’t be surprised if we see a 10 percent correction. That correction ought to be used to buy.”
The DSP BlackRock India T.I.G.E.R. Fund, designed to purchase stocks that benefit most from accelerating economic growth, returned 73 percent in the past year to beat 93 percent of peers tracked by Bloomberg. The firm’s DSP BlackRock Equity Fund has gained 22 percent annually from its inception in April 1997 through July 31, versus a 12 percent advance in the Sensex, the data show.
The Sensex slid 1 percent to 25,329.14 at the close amid concerns over increasing tensions between the U.S., European Union and Russia. U.S. President Barack Obama said yesterday he authorized air strikes against militants in Iraq if they threaten U.S. personnel in the Kurdish city of Erbil.
Islamic militants seized two oilfields in Northern Iraq this week, fueling concern among some traders that crude supply may get disrupted in the Organization of Petroleum Exporting Countries’ second-largest producer.
India gets about 80 percent of its oil from abroad, while the country’s trade gap, which reached the widest in 11 months in June, leaves it vulnerable to capital outflows during periods of heightened risk aversion.
Twenty eight percent of money managers surveyed last month by Bank of America Corp. identified geopolitics as the biggest risk to markets, versus 14 percent in June. Raghuram Rajan, India’s central bank governor, said the same month that such tensions may “unravel hidden vulnerabilities” in emerging-market nations, including India.
Investors haven’t “paid full attention” to geopolitical risks, Naganath said. “In the next two months, these events could keep risk appetite contained.”
Stocks will rally as investors begin to price in accelerating growth in Asia’s third-biggest economy and Modi unveils the federal budget for fiscal year 2016 in February, he said.
India’s economic expansion rate will increase to at least 7 percent next fiscal year from less than 6 percent this year, Naganath said. Corporate earnings growth will probably quicken to as much as 20 percent from about 15 percent, he said. The money manager said he favors shares of drugmakers, financial, engineering, capital goods, energy and technology firms, declining to name specific stocks.
The Sensex has the potential to double in the next three years as increased business confidence and higher capital spending boost profit growth, Naganath said.
The gauge is valued at 18 times reported earnings, in line with the five-year average, data compiled by Bloomberg show. That ratio may climb to 20 in coming years, he said.
“For investors who have not bought enough equities in the last three to four months, any correction will be a good buying opportunity,” Naganath said. “Once we get to the fourth quarter this year and till the budget next year, markets will stage a rally.”