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Markets to ride on improving sentiment

December 10, 2013 09:21 IST

Markets to ride on improving sentiment

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Jitendra Kumar Gupta in Mumbai

While markets are at the all-time highs, the question is whether this improving sentiment (partly driven by expectations of a Bharatiya Janata Party-led central government and the recent election results) will help the rally sustain or gain further ground.

While some experts believe it might not be as easy as it seems for the BJP to post a good show in the 2014 elections, there are others who are equally confident.

More important, they argue the fundamentals of the economy are improving, which should provide support to the markets.

“I would not call it (the rally) euphoria or some sort of bubble at all.

“Over the last couple of months, we have seen fundamentals improving like stability in the rupee, improvement in the current account deficit and slight uptick in the gross domestic product growth.

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Image: Traders eat sweets inside a brokerage in Ahmedabad.
Photographs: Amit Dave/Reuters

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“On the liquidity front as well, a lot of money is moving into equity out of  bonds, which has helped to some extent.

“We need to see these underlying changes for the next two three quarters,” said Rashesh Shah, chairman & chief executive officer, Edelweiss group.

If the fundamentals gain further ground, there could be more upside to this rally.

Notably, experts believe though the markets are at all-time highs, valuations are cheap for a large part.

The Sensex is trading at 14.4 times its FY15 estimated earnings, which is near its 10-year average PE of 14 times.

“At 14 times, it is always a buying multiple, not a selling multiple, particularly when we are at the bottom of the growth cycle.

“There are chances of further re-rating, as market is increasingly looking at the growth to return from FY15 onwards from the bottom of FY14,” said Rajat Rajgarhia, director of research at Motilal Oswal Securities.

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Image: Stock brokers keep watch on the key Sensex share index graph in a brokerage firm in Mumbai.
Photographs: Punit Paranjpe PP/SH/Reuters

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Markets to ride on improving sentiment

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The research house says the September quarter saw a rebound, with Sensex earnings growth of 10 per cent, post a decline of four per cent in the June quarter.

It believes this recovery will gain pace in the second half of FY14, with earnings estimated to grow by 14 per cent.

Thereafter, the FY15 Sensex EPS will grow by 16 per cent, the best growth in four years, it adds.

Pockets of comfort

Experts believe there is room for more appreciation, considering many sectors and stocks haven’t participated in the rally.

Old economy stocks are still reeling under the severe pressure of slow growth and downturn in investment cycle.

“Though the Sensex has hit our year-end target of 21,000, we are maintaining our ‘buy India’ stance because we believe there is a long way to go for the stronger cyclical companies.

“Also, the small- and mid- caps are still radically undervalued,” said Saurabh Mukherjea, head of equities, Ambit Capital.

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Image: A man walks past the Bombay Stock Exchange building in Mumbai December 5, 2013.
Photographs: Danish Siddiqui/Reuters

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Markets to ride on improving sentiment

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Risk to this rally

Though fundamentals and liquidity are helping the markets, experts are also keeping an eye on the coming Lok Sabha elections.

Formation of the new government and its policies will have implications on both, liquidity and fundamentals of the markets.

The political landscape at the national level will change, which is why one would not like to give too much weightage to the recent election results.

If the BJP does not get a strong mandate at the national level or there is formation of a weak government, it could lead to growth worries.

Also, the extent of quantitative easing tapering by the US Federal Reserve will determine the flows to emerging markets like India and hence, will have a bearing on share prices.

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Image: A customer buys fruits from a roadside market in the old quarters of Delhi.
Photographs: Ahmad Masood/Reuters

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What should you buy

Though there is a risk to growth and the market rally, the market consensus is building for better returns.

Most experts are advising stocks where visibility on earnings recovery is improving and valuations are low.

Here, a large part of the market, including the mid and small caps and old economy stocks, are trading at a huge discount to their own historical valuations, as well as the intrinsic value of their business.

Some sectors that fit this criteria include state-run banks and cyclicals like metals and engineering, which could see strong returns should the bullish trend and economic recovery continue.

“We reiterate our faith in this strategy of buying high quality cyclical companies like L&T, Cummins, Voltas, Bajaj Auto, LIC Housing Finance, Torrent Power and ING Vysya, which are trading at discounts to their five-year average multiples,” said Saurabh Mukherjea.

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Image: A worker takes a nap on sacks filled with wheat at a wholesale grain market at Dadri town in Uttar Pradesh.
Photographs: Parivartan Sharma/Reuters

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However, within these pockets also, the market experts recommend quality stocks because of the risk to recovery, given the uncertainty about India’s economic policies and the results of the 2014 election.

Also, many companies run balance sheet risk because of the high debt in their books, which is why investors should keep an eye on the steps companies are taking to lower their debt.

As a word of caution, experts also say the share price of some companies has already moved up significantly in the hope of recovery, which makes these susceptible to any reversal in the current rally.

Apart from cyclicals, some experts believe selective exposure to information technology and pharma companies should also be taken, given the economic recovery in the US and Europe.

Apart from diversification, any weakness in the rupee as a fallout of QE tapering should also rub-off well on such stocks.


Image: An investor reacts at a local stock market in Chandigarh.
Photographs: Ajay Verma/Reuters

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