The markets will continue to gain, as economic indicators are turning positive, says Motilal Oswal, chairman of Motilal Oswal Financial Services.
In an interview with Samie Modak, he says so far, the National Democratic Alliance government has made the right noises, adding this has to be followed by execution. Edited excerpts:
This year, the Indian market has risen about 30 per cent. Do you think the rally is backed by fundamentals?
Economic indicators such as inflation, gross domestic product (GDP) growth and current account deficit have improved. The latest corporate earnings were satisfactory and the sentiment among companies and investors has also improved.
The government is giving the right signals. Clearly, all the right levers are in place for the economy to do well.
We are seeing the feel-good factor is back. It's only a matter of time before the entire economic engine starts working seamlessly.
What is your target for the Sensex and the Nifty?
My sense is around the next Union Budget, the Sensex will stand at 31,000, while the Nifty will be between 9,000 and 10,000.
Though 10,000 is a bit optimistic, if the government makes bold moves, it is achievable. There is liquidity, both globally and domestically, waiting to be deployed in the Indian market.
The government has shown the right intent; now, it should execute some of its promises.
Do you think the market valuations are reasonable?
Though the market has risen 30 per cent this year, valuations are still good. A few companies or sectors, such as consumer goods, are expensive.
But overall, the valuations are reasonable. A year ago, the sentiment was quite weak. But things have undergone a sea change.
Now, companies are looking to invest for the future; they want to build capacities and expand. We are seeing all the three categories of investors - retail, foreign institutional investors and domestic institutions - buying.
The only uncertainty is regarding the reversal in the interest rate cycle. The Reserve Bank of India (RBI) has been fighting the inflation battle for some years.
They have won the battle to manage rupee volatility; now, they have to win the inflation battle.
What are the next triggers for the market?
Prime Minister Modi's trip to the US could be a big trigger for the market. We have seen the Japan trip has been successful; there has been commitment for $35 billion of investment.
The US visit, too, will be keenly watched by investors.
As and when RBI takes a call on interest rates, it will be a substantial trigger for the market. If there is another 50-basis-point increase in GDP growth, it will be a significant boost.
The moment you see growth is back to six per cent levels, it will boost sentiment. Meanwhile, escalation in geopolitical tensions and a rise in oil prices could negatively impact the market, as could government working slowing.
The small-cap index is up 60 per cent this year, while the mid-cap one has risen about 40 per cent. Do you expect these stocks to continue outperforming?
Small- and mid-cap companies always outperform large-cap ones when the market is in a cyclical bull run. These rise sharply, but also decline more than larger companies during a downfall. As such, it is a continuation of that trend.
Do you expect primary market activity to pick up?
Some government issuances such as the CPSE exchange-traded fund have brought excitement back into the primary market. The initial public offering pipeline has always been good. But now, we will see execution improve, too. A lot of companies waiting on the sidelines will now be able to enter the market, thanks to the rally we are seeing.
What you think about the first 100 days of the Modi government?
The biggest plus is that the government has been able to instil confidence among investors and companies. It has shown the desire for a higher level of governance and faster decision-making.
There have been no big-bang reforms but the government is trying to get the basic right. It is putting a basic structure in place.
A 100-day is too little a time for a country such as India to move. But the government has been successful in sending the right signals on the things required to improve the economy. Now, it has to get the machinery going towards better execution.
On the business side, are you seeing an increase in participation from investors?
The June quarter has been one of the best for brokerage firms. The momentum continues to be strong and brokerage rates are not going up, while delivery volumes have improved. We set a higher spread on the delivery side and a lower one on the option side.
For us, the mix is changing for the better. Other new business such as investment banking, private wealth and housing finance are also contributing positively.
We are hiring across segments such as retail, investment banking and private equity. Last year, we added about 250 people; we plan to add the same number this year, too.
Do you expect consolidation in the brokerage space?
We are seeing major organic consolidation, in terms of survival of the fittest. The market share of the top players has improved. Though we haven't seen big acquisitions, natural consolidation is happening.
At the moment, is there 2007-like frenzy in the market?
There's still a long way to go before seeing that kind of frenzy. We are just in the first year of the bull phase. Typically, the market cycle lasts about seven years. At the moment, the situation is akin to that in 2004.