The Indian stock market has been on a roll. It's not entirely surprising considering the fact that the Nifty took almost nine months to consolidate before crossing the 5,500 level, which has resulted in the current sizzling uptrend. It hasn't been an India-specific phenomenon as virtually every other world market has rallied, but this time Asia is leading the world.
Though a comparison with the previous bull run at 2007-end and early 2008 seems inevitable, there is a vast difference in the Indian markets between then and now. While the Nifty is at almost the same level, companies have grown 15-20 per cent in the past few years. The earnings per share have gone up and, correspondingly, the price-earnings ratios have declined. The euphoria in the market has been replaced with caution and retail participation is abysmal. The foreign institutional investor (FII) inflows are at a record high.
The resilience of the Indian economy, coupled with the diligent efforts of the central bank, has led to an impressive gross domestic product (GDP) growth even in trying times. The Indian growth story is just one of the factors responsible for the heavy FII inflows.
The high liquidity and lack of good alternative investment destinations have been fuelling the FII investments in India. An opaque and underperforming Chinese stock market isn't as enamouring as India, which is more of a domestic consumption story.
However, infrastructure bottlenecks continue to be a drag on the economy. If these are removed, GDP growth could remain in double digits for the better part of the next decade. It seems to be a vicious cycle, where a rally in the euro has seen the dollar weakening even against the rupee, which is a direct fallout of the sharp spike in FII inflows in the country. Only a major reversal on the dollar front could see an outflow of liquidity, which would be rather sharp and severe, but it seems far away. The rupee could take a breather near the 44 level before heading for the 42 level against the dollar.
Technicals seem to suggest that the Nifty is on an uptrend in the short to long term. With no negative divergence on the horizon yet, a mere overbought situation would not warrant a change in the view.
An 870-point rally (and counting) in the Nifty could lead to a 300-350 point correction any time, but there seems to be enough headroom for further growth after this anticipated correction, possibly to the 6,700 level in the next 3-4 months. Since the Nifty is close to an all-time high and with very few known resistance levels on the horizon, it would be a difficult task to forecast reversal points on the upside.
A catastrophic decline is not envisaged, and it will be a stock-picker's market in the future as valuations seem high. A simple approach would be to invest through a systematic investment plan. The economy is firing on all cylinders and the next 7-10 years can be extremely rewarding for a diligent investor. The markets are too dynamic to shun investment.
While there are a few opportunities in the large-cap space, the mid-cap category will offer more value. For the long term, Reliance Industries seems like a screaming buy at the current level, while State Bank of India, Larsen & Toubro, Tata Motors and IDFC are decent picks, but only on declines. BEML, Deccan Chronicle Holdings and Elecon Engineering are a few good stocks in the mid-cap universe.
HEMEN KAPADIA
CEO, Chart Pundit
