In the last four months, FIIs have infused over $11.5 billion into the Indian equities on the expectation of India’s improving growth prospects
While market cheered NDA government coming to power, all eyes are now fixed on Budget scheduled on July 5 to boost India’s growth engine and corporate performance.
The Indian equity market scaled to new all-time highs following an emphatic victory of the NDA government. The foreign institutional investors (FIIs) continued to buy Indian equities that kept the market higher.
In the last four months, FIIs have infused over $11.5 billion into the Indian equities on the expectation of India’s improving growth prospects given the pro-development government.
Now with the relief rally behind us following the NDA victory, the market would react to recovery in corporate earnings of India Inc. and efforts from the government and Reserve Bank of India (RBI) to ease liquidity concerns as well as stimulate growth.
While there is the large expectation from the NDA government to revive growth and strike a proper balance between growth and fiscal discipline, it is going to be a tough task considering limited financial resources and lack of private capex.
While the rate cut by 25 basis points for the third time in a row and change in RBI stance to “Accommodative” from “Neutral” is appreciated, the lack of any announcement and measures to infuse more liquidity to already saddled NBFC space does not bode well.
We understand ensuring liquidity to NBFCs is an important factor as of now to spur MSME segment, which contributes 30 percent to India’s GDP.
While India’s GDP growth shrank to 5-year low of 5.8 percent in the last quarter (January–March) of FY19, corporate earnings saw the cascading impact of that, as BSE500 companies (excluding BFSIs) registered 5 percent YoY fall during the quarter.
Hence, we expect the government to take firm measures to restore growth momentum in consumption space.
Continuing government spending is expected to drive corporate performance
With a stable government at the centre, we believe reforms undertaken during the previous tenure are likely to bear fruits in the coming years.
Referring to the election manifesto of BJP, a likely capital investment of Rs 100 lakh crore in infrastructure including roads and highways, urban infrastructure and railways is likely to offer a huge opportunity to Indian corporates.
Further, the visible emphasis of the new government to ensure employment generation after recent poor unemployment data is likely to aid consumption.
We believe that softening of oil prices will provide comfort to the government, which should essentially help it to continue with higher spending for infrastructure development, which will have a positive cascading impact on several sectors as well.
Nifty is currently trading at 18.2 times FY20 earnings factoring a growth of ~18-20 percent, which appears to be reasonable considering 17 percent earnings growth in the first quarter (April-June) of FY20 (mainly contributed by BFSIs).
Now, all eyes will be on the forthcoming budget and market would want the government to kick start the slowing economy. Meanwhile, we expect earnings trajectory to improve further in the second half of FY20 with improvement in governments spending and revival in the MSME sector.
A consistent earnings growth of 15 percent will certainly take Nifty to 13,000-13,500 in FY20, an upside of 9 percent to 13.5 percent from the current level of 11,900. Hence, we advise investors to buy quality stocks with every downfall.
The author is Head Retail Broking, Reliance Securities.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
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