The bulls are ready

The strong reversal in stock prices since the lows of February may have surprised sceptics who had predicted an abysmal year for Indian equities this calendar, but the rally is not entirely unjustified. The benchmark Sensex is up 25 per cent from the year’s low due to various factors, both domestic and external, that enhance the prospects for India’s economy. The latest quarter’s results of companies show distinct signs of revival in demand. Revenue that was declining in the first three quarters of FY16, stabilised in the March quarter to record a flat growth. There is further improvement in sales growth at 3.5 per cent in the June quarter, going by the results announced so far. Demand is expected to get a further boost with the Seventh Pay Commission pay-outs, good rain this monsoon season and better transmission of interest rate cuts.

External conditions have also been favourable. Stock prices took a severe knock in 2015 and in the first quarter of 2016 on concerns of global slowdown led by China, crash in commodity prices and impending interest rate hike by the US Federal Reserve. But the reversal in prices of commodities, especially crude oil, from February this year, has helped resuscitate the stock prices of commodity producers which have the largest market capitalisation on many bourses globally, including India. Concerns over the impact of Brexit on European economies have also worked in favour of India, since Indian stocks are perceived as being better insulated. While challenges remain for many segments of the market such as banks that are weighed down by stressed assets, pharma and power companies that are grappling with regulatory issues and IT companies dealing with slowdown in target markets, consumer-centric sectors appear set for better days ahead.

That said, there are distinct signs of overheating in many segments of the market. The Sensex has wiped out most of the losses made last calendar and is just 6 per cent short of a new lifetime high. This appears a trifle over-optimistic given that corporate earnings are yet to revive significantly. The rally in mid- and small-cap stocks is much steeper with both the S&P BSE mid- and small-cap indices at fresh lifetime highs and valuations reaching alarming levels. There are other signs of froth evident in the massive over-subscription in some of the recent primary offers, the huge listing gains in some of these issues, revival of interest in penny stocks and so on. The stock market regulator needs to stay vigilant in such conditions to check excessive speculation to protect small investors.

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