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5 Year Bull Market Ahead?

Monday, March 24, 2014
By Mayura Shanbaug

The current rally in the Indian stock markets is believed to be the combination of more than one factor. The positive anticipation of a stable government at the centre, post elections coupled with the strong pull of anticipated growth of emerging markets has prompted Foreign Institutional Investors (FIIs) to continue and increase their stock holdings - FIIs have invested $ 2 billion so far this year- in the markets. However, there are a few  factors for concern like the recent hailstorm that has cost crops worth of Rs 12,000 crore so far. Scientists have predicted that an El Nino formation may again stall this years monsoon, which may create a drought situation, affecting the overall agricultural production and thereby further fueling high inflation. There is another worry: what if in spite of all the predictions, India does have a coalition government at the centre?

“If there is a coalition government at the centre, with a Modi led BJP coveting less than 200 seats, then we may see a 10% downside in the Nifty. Nifty may go back to the level of 5800 from the present 6500 levels,” says Hemen Kapadia, CEO, ChartPundit. “The level may see a further slide up to 4500 level, if BJP does not come to power,” he says.

However, Kapadia insists that the recent lifetime high at the Indian markets are strongly based on conviction of the foreign investors that the business friendly Narendra Modi will come to power this time. “It won’t be a cake walk even for Modi to turn around the economy fast, but if his party gets a comfortable total then he would be able to call shots,” explains Kapadia. “GDP growth may hover around 7% for the next two years and the markets will see a five year bull run” he says. I see a level of 9000 on the Nifty and 36000 on the Sensex by 2017,” predicts Kapadia.

Arun Kejriwal, Founder, KRIS also believes that FIIs will continue to remain invested in the Indian stock markets as in-spite of the slow growth, the Indian consumption and demand story is intact. “The sole driving factors for these FIIs led rally in the markets is money,” says Kejriwal.

“Compared to other developed countries, Emerging Markets (EMs) like India has grown at 4.5%, whereas the growth rate in Europe is just 1%,” he says. Kejriwal points out that in this rally there is no retail participation. “This rally is not a euphoric driven retail rally, but a very sustainable rally based on strong fundamentals,” he says. Kejriwal explains that most heavy weight companies of the BSE 100 are growing at 20% and the markets are at 16.5 times of the current years earning. “I see a level of 8500 on the Nifty by February 2016,” he says. 

“We are very comfortable on the earnings growth trajectory for FY14 & FY15E, since more than 70% of Nifty companies provide good visibility,” says Rajesh Iyer, Head of Investments & Family Office, Kotak Wealth Management.

On most parameters ranging from PE ratio, Price/BV, EV/EBITDA to Market Cap/GDP, Nifty is trading below its 5 & 10 year averages. “Excluding the P/E ratio, on most parameters, the Nifty trades at around 15-25% discount to its 10 year average. We recommend 100% deployment into equities as of now since the upside rewards in equities could be far higher than the downside risk,” suggests Iyer to his investors.

Iyer, too believes that, if the election mandate is good and there is an NDA regime, then we could see a two-three years bull market. “Investors can expect a 15% CAGR for next 2-3 years under this scenario, hence it will be wise to stay invested post-election,” he says.

However, “Any non NDA formation will be negative for the market and we could see a 10-15% correction in the near term. But, we do expect to see an uptick after a few months as any new government will need to continue with the reforms process,” says Iyer.

“In the worst case scenario, if we have a third front forming the government, then market valuations could contract and we could recommend going underweight on equities. As of now the probability of an NDA forming the government is very high and we are going with this assumption,” says Iyer.

In the global scenario, the Quantitative Easing by the US Fed will be offset by the continued FDI flow in to Indian shores, believes Gul Teckchandani, an Investment Expert. If crude oil prices come down, then it will another positive for India and its markets,” says Teckchandani.  “If Modi comes to power then the Nifty will see a level of 7000 post election,” he says.

El Nino Fear…
International climate researchers are predicting an enhanced possibility of an El Niño in 2014. The condition, which occurs at irregular intervals of 2-7 years, weakens the Asian monsoon, often causing drought in north-west and central India and heavy rainfall (or even floods) in the North-east.

According to the Weather Bureau, there is a strong indication of an El Nino event. “While we factor a normal monsoon in our agriculture GDP growth estimate of 3.3%, a full-blown drought scenario (due to El Nino conditions) can lower this estimate to 0.5-0.8%. This would lower our FY2015 GDP growth estimate to approximately 4.7% from our base-case estimate of 5.1% in FY2015,” says Indranil Pan, Economist, in a recent Kotak Economic Research report.

“However, we continue with our base-case estimates of GDP growth of 5.1% in FY2015 and retail inflation of around 8% in March 2015, till we have further clarity on the sustainability of the weather patterns,” says Pan.

However, Arun Kejriwal believes that unlike 2009, when El Nino had created havoc for Indian monsoon and crops, this time we are lucky to have a bumper crop last year and this year’s Rabi crop. “I feel we should not be worried with El Nino,” he says.  

As per a CRISIL Report, an El Niño does not necessarily lead to monsoon failure for India. Since 1991, of the seven times that an El Niño was experienced, only two of the years synchronised with a monsoon failure or a drought situation in the country. Past data therefore suggests a nearly 30% chance of an El Niño condition morphing into a monsoon failure. 

“We will review our growth call in June 2014 after (i) the Indian Meteorological Department (IMD) releases its monsoon forecast and (ii) more accurate forecasts on occurrence of an El Niño are available – forecasts models are said to have low accuracy in the March to May period,” states the report.

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