Indian bulls run headlong into politics
After breaking through the 18,000 mark last month India's benchmark Sensex index has cooled in recent weeks. Worries about the nation's increasingly dysfunctional government have dented bullish sentiment.
March 27, 2012 / 12:58 IST
After breaking through the 18,000 mark last month India's benchmark Sensex index has cooled in recent weeks. Worries about the nation's increasingly dysfunctional government have dented bullish sentiment.
Following a torrid 2011, Indian equities have risen about 11% this year and reached a seven-month high in February, fuelled by a mix of political optimism and a sharp rise in foreign investment flows into Asia's third largest economy. However, hopes that further positive developments could sustain the market's two-month rally were knocked back after disappointing election results for India's ruling Congress party in early March, and a national budget widely criticised as lacklustre.More News From Financial Times
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On Monday, the Sensex fell 1.8% to 17,052.78, its lowest in nearly two months.Nonetheless, some analysts say the bullish case for India looks stronger than at the start of the year, a view reflected in Goldman Sach's upgrade to its outlook for equities from under-weight to market-weight on Friday.The investment bank pointed to a weakening of global risk factors, notably an easing in the eurozone debt crisis, and argued the "domestic growth cycle may re-accelerate heading into the second half of the calendar year." A number of international factors have been behind the gains of recent months. The ultra-loose monetary policies of central banks including the Federal Reserve and European Central Bank, coupled with signs of a US economic recovery, have encouraged investors to put money into risky assets. Foreign institutional investors have poured more than USD 8bn into Indian equities this year. The turnround follows a withdrawal of USD 512m in 2011, investors pulling out money last year amid worries over flagging domestic growth, rising inflation and a weakening currency in the latter half of the year. The rebound in 2012 has also seen India's long-dormant primary markets show signs of life, notably through the successful launch of the country's first initial public offering in for more than six months. Grim market conditions led more than two dozen companies to scrap listings last year, putting on hold plans to raise more than USD 6bn, according to SMC Global Securities, a New Delhi broker, with a further dozen also postponed this year. But an offer for shares in Multi Commodity Exchange, the world's fifth largest commodities exchange and the first exchange to list in India, came out 53-times subscribed, raising hopes that further issuances would follow. Two much smaller IPOs are now set to test the market, one for National Buildings Construction Corporation, a state-run group seeking to raise around USD 25m, and a second for MT Educare, an education tutorials company, which debuts on Tuesday. Rising market sentiment has also seen investors look to cash out investments. Citigroup raised nearly USD 2bn by selling its 10% stake in Housing Development Finance Corporation, a housing finance company.Private equity investors have also been looking to take advantage of improved conditions to offload stakes, too. Warburg Pincus sold the remainder of its stake in Kotak Mahindra Bank on Monday, raising in the region of USD 280m. However, analysts say the return of larger IPOs looks unlikely for now, given nagging investor suspicions about weak underlying conditions, a fact driven home by the near collapse of a large government divestment at the start of this month. Hoping to tap into increased demand from foreign investors, India's government rushed forward plans to raise about USD 2.5bn through the sale of a stake in state-backed Oil and Natural Gas Company. But investors were turned off by the decision to offer shares at a premium, necessitating an embarrassing last-minute intervention from Life Insurance Corporation, another state-backed company, to complete the issue.A gradual loosening of monetary policy is expected to boost sentiment in the coming months, with the Reserve Bank of India widely predicted to start reversing more than a dozen rate increases over the last two and half years, by cutting rates slightly in AprilThe biggest hurdle to further stock market gains, and a wider IPO revival, however, remains political. With a scandal-tainted government unable to free investment in infrastructure or make substantial progress in reducing the country's fiscal deficit, analysts say a return to the bull market that began the year is unlikely.Indian equities are trading at a price-to-earnings ratio of more than 15 times, the second highest of MSCI's 11 leading emerging markets, according to research from Espirito Santo, a Mumbai-based investment bank. "India's markets are now fairly valued, but there are still too few long-term investors so many more IPOs will be difficult unless they get priced cheap," says Sanjay Nayar, chief executive of KKR India. "For the markets to go up further we need to see earnings growth come back in the high teens or early twenties, but I don't see any government reforms on the supply side, or the creation of many new physical assets, to make that seem likely in the short term." Discover the latest Business News, Sensex, and Nifty updates. 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