Foreign fund flow washing away ground realities

Continuous buying, especially by foreign institutional investors, lifted the benchmark indices — the BSE Sensex and the NSE Nifty — almost close to their all-time peak levels, registered in 2008.

Foreign investors have poured almost $15 billion (Rs 91,910 crore today) since the start of the year that shows an improvement in market sentiment towards India. Data from the National Stock Exchange show that foreigners are becoming more optimistic about market prospects, with long positions on index futures outweighing short positions by a huge margin of about six times.

Despite ground scenarios indicating rather a pale picture, Indian benchmark indices are rising, raising hopes that they would soon reach new heights.

Is the sharp jump more of a dead-cat bounce or have the markets created a bottom and can rally from here despite domestic headwinds?

Now, many experts believe the BSE Sensex may touch 21,000 by Diwali (November 3).

Notwithstanding the above prognosis, analysts have reasons to be sceptical about India. Mounting Government interference in the economy and businesses, signs that the country's growth model is fatigued and political uncertainty have kept many domestic investors on the sidelines.

According to Dun & Bradstreet Composite Business Optimism Index, five out of the six indictors – volume of sales, new orders, net profits, inventory levels and employees — have registered a decrease in the fourth quarter of 2013against the comparable quarter last year.

A recent Morgan Stanley survey said only 21 per cent of the investors had an overweight position (vs. 39 per cent in February 2013) – the lowest level since 2011 and the lowest since the investment bank began this survey.

Stock picking is their preferred portfolio strategy, the survey, taken between October 4 and 10, has revealed. Only a third of the polled investors believe India will beat emerging markets in the next 12 months – albeit higher than in 2011. According to the survey, investors expect the BSE Sensex to be at 20,949 in 12 months.

India's stock valuations are not in sync with the deterioration in fundamentals, said Jefferies, an investment bank. In fact, the valuations are already implying a reversal to the median RoEs (return on equities) for most sectors. Consensus estimates are for a marginal recovery to 15.6 per cent in FY14 for the Nifty ex-financial RoE.

“In case of a revival in the economy, we prefer the early and mid-cyclicals such as industrials, discretionary and, to some extent, utilities,” Jefferies added.

Risk appetite

Much of the recent rally could also be attributed to a delay in the expected unwinding of the US stimulus measures, which for years have supported global appetite for risk.

Recently, Goldman Sachs put out a report reiterating its belief that the US Federal Reserve would not raise interest rates until 2016, suggesting well over two more years of easy liquidity and rising asset prices.

Bets that the Fed may postpone a tapering of its bond-buying programme, if proven correct, would most likely boost emerging markets in general, India included.

The problem with this is that it leads to bubbles – when prices are rising simply due to too much money chasing too few goods or services.

So, it would be unwise to short this market despite all bad news about growth or inflation or deficits are still around.

As long as easy money is available, bulls will enjoy their party.

badrinarayanan.ks@thehindu.co.in

(This article was published on October 21, 2013)
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