Bulls back the right horse

Monday, May 17, 2004: The BSE Sensex ends the day down 11.13 per cent, after hitting the lower circuit limit twice in the day. The outcome of the General Elections has clearly caught market players by surprise; instead of the NDA government coming to power, the UPA will form the government, with plenty of help from the Left parties.

Monday, May 18, 2009: The BSE Sensex closes 17.33 per cent higher, with the index hitting upper circuit limits twice in the day. The UPA will form the new government without the support of the Left parties. That’s beyond most investors’ wildest dreams.

Bolts from the blue are welcome when they’re positive ones. But the element of surprise is by nature momentary. So when the stock markets reacted to the sweeping victory of the Congress and its allies at the hustings last fortnight with a record-breaking 2,111-point rally in a single day, the surprise factor was clearly kicking in, in grand style. Over the next few days, the expectations piled up—disinvestment in public sector undertakings, investment in infrastructure, a reduction in the fiscal deficit…the list is long, and formidable. As days passed, the markets sputtered, perhaps weighed down by the weight of such lofty hopes.

But then there’s no better time than now to think big. Markets point that the time is ripe to start planning for a 9 per cent growth in the gross domestic product (GDP). And there’s plenty that can be done to get a move on. “The fiscal deficit can be controlled through disinvestment and by selling 3G licences,” says Krishnamurthy Vijayan, Executive Chairman, JPMorgan Asset Management in India. He estimates that these two measures alone can reduce the fiscal deficit by Rs 50,000-60,000 crore. Shankar Sharma, Vice Chairman and Joint Managing Director, First Global, too, expects disinvestment to rake in huge money for the government over the next couple of years. “Disinvestment alone can raise Rs 50,000 crore in the next two years,” says Sharma.

The FII factor
Such big-bang reform will go a long way in bringing back by the truckload the foreign institutional investors (FIIs), who have anyway been tentatively buying into Indian equity since the beginning of the year. Till May, the FII inflows stood at $1.3 billion (Rs 6,500 crore).

After the election results, on just one single day—May 19, a day after the 2,111-point burst—a billion dollars came in. Such inflows will not only push up stock prices, they will also aid in the appreciation of the rupee, which in turn will yield other benefits. “Rupee appreciation will help corporate India as a weak rupee affected a lot of companies last year,” says Dharmesh Mehta, Head of Equities, Enam Securities.

Since April, the Indian rupee has appreciated by 5.4 per cent against the US dollar. Many companies went into the red in the year ended March 2009 due to the provisions they had to make for currency fluctuations for the funds raised through foreign currency convertible bonds.

“That trend could now get reversed. Just after the election results, most of the broking houses that were negative on India have turned bullish. For instance, Christopher Wood, Strategist at Hong Kong-based brokerage and investment bank CLSA, has doubled India’s weightage to 14 per cent. “The result will be a surge of portfolio capital into the Indian stock market since many foreign investors had been wary of betting on India because of the sheer unpredictability of the electoral process,” says Woods in his latest Greed & Fear report. JP Morgan’s Vijayan says his firm was underweight on India before the elections and the country would be upgraded to neutral very soon.

With a change in weightage for India, foreign investors will have to increase exposure,” he adds. “The broad message is that there will be bolder measures and decisions: Like, for example, wider participation of foreign players in sectors like insurance and retail,” says Nipun Mehta, Executive Director & Head-India, SG Private Banking. The new government is also expected to take steps to attract foreign direct investment in infrastructure sectors like power, ports, airports and aviation.

The key word to remember of course is “expect”. “We have built expectations and anything below (these expectations) will be treated negatively by the market,” says Motilal Oswal, Chairman, Motilal Oswal Financial Services. He feels the government should have a longterm plan to hit a GDP growth of 10 per cent. When an air of expectancy prevails, there’s no harm in dreaming big and hoping for the best.