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Factors that can drive stocks higher in coming months

Factors that can drive stocks higher in coming months

Experts say there are many reasons to keep the faith in Indian stocks. The longterm outlook, they say, is bright, if not outright spectacular.

PHOTO: Reuters PHOTO: Reuters
In recent months, the stock market has been as volatile as it has ever been, with the India VIX index, an indicator of volatility, rising from 16.99 on June 3 to 19.98 on July 11. Compare this to last year's average of 16.4 and you will know what we are talking about.

In the last few weeks, a day or two of sharp ups has been followed by equally steep falls. For instance, on May 13, the BSE Sensex fell 430 points to 19,692, but rebounded 490 points on May 15. On June 20, it slid a massive 526 points, only to rise 520 points a week later on June 28. These sharp fluctuations were punctuated by several 300-odd points up and down movements on many days of May and June.

Rs 11,000 cr
is the net amount that foreign institutional investors withdrew from Indian equities in June this year.

The Sensex's roller-coaster ride took it to 20,101 on January 21. However, it slid to 18,226 on April 9, only to touch 20,286 on May 17 and fall to 18,552 on June 26.

As we write the report, the Sensex again rose above 20,000 on July 15.

"Investors should be prepared for volatility. Though we expect the indices to remain range-bound for the next few quarters, the day-today volatility could be significant," says Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services.

"The big risk is from global markets, where withdrawal of money from shares, in particular emerging markets, could lead to a downside. Possible worsening of the balance of payment position and negative surprises on the political front are also threats," he says.

Amid this negativity, the trading volume of the BSE Sensex stocks fell over 5% in the first six months of the year compared with the July-December period of 2012. The reasons for the gloom are many - India's high fiscal deficit and inflation, falling industrial growth, downsizing of the US' quantitative easing programme, strengthening of the US dollar, and slowdown in China and the developed world.


While investors may be getting spooked by this turbulence, experts say there are many reasons to keep the faith in Indian stocks. The longterm outlook, they say, is bright, if not outright spectacular.

While a range of factors has led to foreign investors pulling out loads of money from Indian equities in the last few months, the government has carried out a series of reforms to improve its finances and increase investments. Plus, attractive valuations and the huge size of the Indian market will keep foreigners interested in India's stock markets in the long run.

Let's look at these and other factors that may help investors earn good returns from stocks for the next three years.


The Sensex has remained range-bound for the past three years. However, earnings of companies have grown at a compounded annual growth rate, or CAGR, of 7% during the period. As a result, the market price-toearnings, or P/E, ratio has become attractive; it is now well below the historical long-period average. P/E ratio denotes valuation, that is, how much are investors willing to pay for a company/index compared to its/their earnings.


Valuations are looking attractive. We can expect 15% annualised return from the stock market for the next three years.


Chief Investment Officer, Karvy Capital

The Sensex is currently at a reasonable 14.1 times 2013-14 earnings per share, or EPS, of Rs 1,381 and 13.6 times one-year forward EPS. The historical average is 14 times oneyear forward earnings. Index P/E ratio is calculated by dividing the market capitalisation of companies in the index by their net profit.

The market capitalisation to gross domestic product, or GDP, ratio is also near the historical longperiod average of 65%. It has fallen significantly from the peaks of the past eight years. The ratio indicates whether the market is undervalued or overvalued. A figure higher than 100% shows overvaluation. Anything less than 50% shows that the market is undervalued.


This year the India Meteorological Department, or IMD, has predicted normal rainfall - 98% of the long-period average of 89 cm-for the country in the entire monsoon season from June to September.

According to the IMD, rains were 37% above normal during June 1-26. It has forecast good precipitation during the critical sowing months of July (101% of normal) and August (96% of normal), which will improve kharif output. A bumper paddy, sugarcane and cotton output will cool inflation. This, in turn, will give the Reserve Bank of India, or RBI, room to lower interest rates.

"Normal monsoon and pre-election spending will increase rural consumption this financial year," says Vivek Mahajan, head of research, Aditya Birla Money.

"Normal monsoon will increase rural prosperity and spending. For instance, we could see decent tractor sales," says Swapnil Pawar, chief investment officer, Karvy Capital.


Economic reforms can go a long way in improving investment climate and boosting investor sentiment. Of late, the government has cheered investors by increasing prices of diesel, LPG and natural gas, setting up a coal regulator and raising foreign direct investment, or FDI, limits in various sectors such as telecom and defence.

Experts say these and other reforms can improve sentiment. "If the government continues on the reform path, investors could become confident about the macroeconomic environment. The sheer intent to chart the reformist path is comforting for investors, especially when investment opportunities in other emerging economies are shrinking," says Ketan Karkhanis, head, equity relationship service, ICICI Securities.


Except in 2008 and 2011, foreign institutional investors, or FIIs, have been net buyers of Indian equities in every calendar year since 2000. FIIs netsold equities worth Rs 2,714 crore in 2011 and Rs 52,376 crore in 2008.


Though we expect the indices to remain range-bound for the next few quarters, the day-to-day volatility could be significant.


CMD, Motilal Oswal Financial Services

This year, they invested Rs 83,205 crore till May. However, they pulled out Rs 11,000 crore in June. Market experts say this was not specific to India and almost all emerging countries faced this after the US central bank said it might reduce the flow of dollars it has been pumping into the market to support growth.

Anand Rathi, chairman, Anand Rathi Financial Services, is confident that FIIs will keep investing in India. "We do not see any large-scale pullout from India. While the inflows could be sluggish for some time, they should be back on track towards the end of the year," he says.

Harsha Upadhyaya, head, equities, Kotak Mahindra Asset Management Company, seconds Rathi. "We believe that after the knee-jerk reaction, foreign investors are likely to again look at India more favourably, as it will gain from the expected softness in commodities as a result of lower liquidity in the medium to long term. Also, India is still one of the high-growth regions," he says.


The Wholesale Price Index inflation has fallen at a rapid pace over the past six months from 7.3% in December last year to 4.86% in June. A possible lowering of commodity prices could have a further salutary impact on inflation and, thereby, boost stock markets.

"If crude oil falls in the near future, or the rupee reaches its earlier levels of 55-56 against the dollar, the markets could give higher returns," says Karkhanis of ICICI Securities.


We expect domestic and global factors to improve over the next few months. This, coupled with low valuations, should reduce the risk.


Head, Equities, Kotak Mahindra AMC

Slowing inflation brings down interest rates, which may cheer India Inc. "The RBI is likely to cut the repo rate by another 50 basis points in the later part of the financial year and carry out open market operations to ease liquidity and aid monetary transmission. We are advising investors to buy quality interest rate-sensitive shares from a long-term perspective," says Ambareesh Baliga, managing partner, global wealth management, Edelweiss Financial Services. Repo rate is the rate at which commercial banks borrow from the RBI. A lower repo rate will help banks get money at a cheaper rate.

Though inflation is falling, rupee fall may play spoilsport by increasing prices of commodities such as crude oil, some edible oils and certain chemicals (combined weight of around 25% in the price index) that India imports in large quantities.

Since the beginning of 2013, the rupee has fallen 10% to Rs 60.13 against the US dollar. It touched a lifetime low of Rs 61.05 on July 8. According to market experts, 1% rupee fall adds 20-25 basis points to headline inflation.


Current account deficit for 2012-13 was a high 4.8% of GDP. The reason was sluggish exports due to slowdown in the world economy and high imports due to firm crude oil prices and substantial coal and gold imports. High CAD triggers weakness in the domestic currency (which we have seen increases inflation) as foreign investors perceive the country as risky and increase the cost of funds. It also increases the country's dependence on portfolio inflows for financing the deficit. These capital inflows, by their very nature, are volatile and can reverse in a very short period.

The government's recent steps to control CAD, such as tightening gold imports, might be positive for stock markets. "The outlook on the CAD has become better of late with fall in crude and gold prices. This and revival in exports and higher production of coal domestically should pull down the CAD to less than 4% in 2013-14," says Rajiv Mehta, assistant vice president, banking, capital goods and infrastructure, India Infoline.

CAD normally occurs when a country's imports of goods, services and transfers are more than the value of goods, services and transfers that it exports. This makes the country a net debtor to the world.


Analysts are positive on export-oriented sectors on account of rupee depreciation, while some believe that sectors such as auto can give good returns due to expectation of normal monsoon.

"We continue to prefer sectors like banking and automobile. Defensive sectors like FMCG, IT and pharma, though expensive, also look attractive from the capital preservation perspective," says Karkhanis of ICICI Securities.

"We prefer the financial sector because of strong growth potential. It is likely to benefit as the economy recovers. The energy sector is also lucrative as reforms will create significant earnings growth," says Oswal.

is the rise in the Sensex between January 1 and July 17 this year.

For stock-specific investors, we spoke to various market analysts and tried to find out some blue-chip stocks which can give handsome returns in the present market


Despite several uncertainties, market experts feel retail investors should not shy away from equities. Waiting on the sidelines in the hope of timing the entry into equities is an exercise in futility.

Motilal Oswal says, "A relatively low-risk or low-involvement strategy for lay investors is systematic investment in a good index fund. A small investor could begin with an amount as low as Rs 1,000 every month. Returns from a simple investment strategy over 5-10 years can be impressive."

However, Mehta of India Infoline says, "It is clearly not a conducive market for retail investors unless the objective is to buy large-cap stocks on deep corrections. Passively, they can participate through systematic investment plans in Nifty ETFs or largecap equity mutual funds."