Since the Budget day lows of 6825 investors have acted as a reluctant bride, unable to accept the market rally and always finding ways to justify their being on the sidelines. And now when the markets have closed at 2016 high of 8683, rallying 1858 points or 27.2 percent from those lows, participation is going to be all the more difficult for those still on the sidelines.
The markets made an effort Thursday to follow an old adage on Dalal Street –‘Buy the rumour Sell the fact’ when the GST Bill was passed in Rajya Sabha, but it failed as the benchmark clawed into the green and triggered a massive short covering on Friday that marked the highest closing this year.
Investors should take note that markets are headed higher, with or without you.
The way the twin events of a good monsoon and the GST passage are panning out, it will lead to a re-rating of India by the rating agencies.
The IMD has forecast 107 percent precipitation for August and September. This means that even reservoirs, which are below last year’s level, will be full by the time the monsoons end in September.
As far as the GST is concerned the main obstacle of the Rajya Sabha passage has been crossed. The rest is all a matter of time.
The analyst community is too much worried about the high PE ratios. But the issue they need to pay attention to is the relative strength of the Indian Rupee.
In order to appreciate the impact it will have on further expanding the PE ratios, one will have to look the dollar returns of the FII investors in the past.
While our Nifty is up 38.12 percent from the closing highs of 6288 registered on 8th of January, 2008, the returns in dollar terms is a minus 18.8 percent. That’s because the dollar has appreciated 70 percent in this period.
Now consider this, of the USD 22 trillion that goes into the treasury bonds, USD 7 trillion has negative yields. Global investors will have an appetite for higher yielding emerging market debt.
Net inflows to funds that buy emerging-market bonds reached an all-time high in the week through July 20, USD 4.9 billion, to be precise.
India with its good monsoons, the biggest post independence reform, an inward looking economy, its enviable demographic profile and the highest GDP growth amongst the large economies will be too irresistible a proposition to ignore.
This inflow in Indian treasury will mean that the rupee will not depreciate as much. So if the FIIs know they are not going to lose much in the currency they will be willing to accept even a lower equity return than before and money will pour in the equity segment, which further bolster the currency.
A stellar Non-farm pay rolls data for the month of July that came in better than expected buoyed Wall Street Friday with all the three main Indices, the Dow , the S&P 500 and the Nasdaq closing at fresh all time highs.
While chances of a Fed hike have gone up, I do not expect any rate hike by the US Federal Reserve in September as the US GDP continues to grow at an anaemic pace. The first estimate of the Q2 GDP came in at 1.2 percent against expectations of 2.6 percent.
With no US hike in the offing, the emerging currencies will continue to do well, after a mild decline Monday.
Get ready for a higher highs and higher PEs as well.
(Vinod Sharma is Head of Business- Private Client Group, at HDFC Securities. The views expressed are personal)