Equities Boom As Reforms Change India Outlook

Indian Equity Markets are expected to extend their rally and gain almost 5% by year-end, spurred by optimism that fiscal and economic reforms show the government is determined to mend the economy and regain the confidence of foreign investors. The Indian Equity Markets front-line indices have rallied so far. The 50-unit S&P CNX Nifty hit its highest level in September, in more than 14-1/2 months. The BSE-Sensex hit its highest level in more than 14 months. The slew of pro-business reforms timed along with the large multiple simultaneous Quantitative Easing in major economies around the globe have changed investors outlook towards India & its Equity Market dramatically.

Small-Caps Up
In the previous four sessions of the week, the Small-Cap and Mid-Cap indices had out-performed the front-line indices. Key benchmark indices in Equity Markets edged higher on last trading session of the month and the quarter, with market sentiment was boosted by data showing that foreign funds remained buyers of Indian stocks on Thursday, 27 September 2012. From a recent high of 18694.41 on 25 September 2012, the Sensex had lost 114.91 points or 0.61% in two trading sessions to settle at 18,579.50 on Thursday, 27 September 2012. The Sensex advanced 1,333.18 points or 7.64% in September 2012 as government initiated economic reforms. The barometer index advanced 1,332.76 points or 7.64% in Q2 September 2012. The Sensex has jumped 3,307.82 points or 21.4% in calendar 2012 so far (till 28 September 2012). From a 52-week low of 15,135.86 on 20 December 2011, the Sensex has risen 3,626.88 points or 23.96%.

Auto, Metals, Realty, Power, Consumer Durables and Capital Goods indices in the Indian Equity Markets have been the top gainers among the sectoral plays, lately. The INR -- Indian Rupee rose to a near five-month high after the Government stuck to its FY13 market borrowing program for the fiscal second half and said it will not borrow more in the current year. The Government of India on Thursday said it would borrow Rs. two trillion, selling bonds in the second half of FY13, which begins on October 1, in line with the budget estimate earlier this year. Economists are still skeptical that the Government will be able to meet its fiscal deficit estimate of 5.1% of GDP. Already, the Government’s subsidy burden is running higher than expected. Average borrowing via bonds sales will be Rs. 120-130bn per week between October and February. The Government is due to sell Rs. 150bln of bonds this week, taking its borrowings in the first six months of FY13 to Rs. 3.7 trillion.

Equity Markets undertone Upbeat on Optimism, Govt. will continue Reforms Agenda
Equity Markets shot up almost 8% in September, driven by a rush of foreign institutional inflows after the government’s policy push, investors are seeking more such pro-business measures, including an increase in the foreign direct investment limit in the insurance sector, to keep the interest in stocks going. The Stock Market undertone is still upbeat on optimism that the Government will carry on its reforms agenda forward in the coming days and weeks. It’s now up to the government to help stock markets extend gains in the truncated trading week ahead. The government’s decisions to increase diesel prices and open up retail sectors to foreign direct investment resulted in foreign institutional investors (FIIs) pumping in about 19,000 crore in September. So far in 2012, they have net bought shares worth 82,331 crore. Though critics argue FII inflows may start receding as India is trading at 30% premium to emerging market equities, optimists, including Macquarie, said indices are still at 7% discount to the long-term average even after the 22% rally so far this year. Indian companies will start announcing second-quarter results by the second week of October.

Equity Markets will closely watch the wordings in the final report of the Parthasarathi Shome-led panel, constituted to look into the controversial General Anti Avoidance Rules (GAAR) and retrospective tax proposal that will be submitted to the finance minister on Monday. Equity Markets are currently trading at 14.5 times price-to-earnings multiple, which has been the 10-year average. The argument now is do you want to buy stocks in Equity Markets at 10-year average prices when current earnings growth is so low. The BSE Sensex was significantly undervalued at the start of the year compared to historic averages, but the gap is narrowing. Australian bank Macquarie estimates the MSCI India index is trading at 14.3 times fiscal 2012/13 earnings, compared to 9.7 times for the MSCI China or 12.3 times for the MSCI Asia Ex-Japan index. Analysts say the removal of SAIL and Sterlite from Nifty, underlines the negative sentiment prevailing on the materials sector even as valuations are at multi-year lows.

Equity Markets may Correct a bit after Recent Surges
After an almost 21% rise so far this year, the Indian stock market is not cheap. A sharp domestic slowdown and uncertainty about the global economy could prevent Indian Equity Markets from rising much higher in the immediate future. The forecasts are upbeat even though India’s main index is already Asia’s second-best performing index this year, beaten only by Thailand’s SETI, and is on course to rack up its biggest year of gains since 2009. However, the government has changed direction since the summer, with the appointment of P. Chidambaram as finance minister. Foreign investors have bought close to $15 billion of Indian stocks so far this year, after net outflows of about $500 million last year. The Nifty has an immediate downside support at 5590 which if breached on negative developments only, could lead to our earlier resistance range which would now provide the much needed strong support around 5365 to 5302. Upside resistances seen for the Nifty now seem marked around 5779, 5986 & then at 6085. Equity Markets can be expected to maintain upbeat moods till the end of November.

Equity Markets in the week gone by saw the Nifty sliding lower in the initial part of the week and touching a low of 5638. A recovery came on Friday, which led to the Nifty moving above its previous highs of 5720 intra-day. The Nifty however ended the week with marginal gains of 0.21% just above the 5700 mark at 5703. Fitch Ratings lowered India’s growth projection for the current fiscal to 6% from 6.5% estimated earlier, citing challenging economic outlook. India’s economic outlook remains challenging. The projections for real GDP growth now trimmed to 6% for FY 2012-13 from a previous estimate of 6.5%. Although reforms alone are not the key factor for these credit ratings agencies, 11 out of 16 of those polled said India would avoid a credit rating downgrade.

With the Nifty moving above the previous highs of 5720 intraday, the underlying trend remains up. Weakness could emerge if the recent lows of 5638 are broken. Most of the sectoral indices ended in the green. The Equity Markets top gainers were Consumer Durables, FMCG, Realty and Power, which rose by 4.8%, 4%, 3.9% and 3% respectively. The losers were Oil & Gas, Metals, IT and PSU, which fell by 2.2%, 1.4%, 1% and 0.9% respectively. Eight Equity Markets core industries grew at a slower pace of 2.1% in August, as against 3.8% in the same month last year due to negative growth in crude oil, natural gas, fertilizer and cement. During April-August this fiscal, the growth has slowed to 2.8%, from 5.5% in the year ago period. The moderation in growth was on account of the negative growth in the production of natural gas, cement, fertilizers and crude oil, besides a decline in the growth rates of steel and electricity production.

Equity Market Awaits Final Report on GAAR, likely to be submitted today
Prime Minister Manmohan Singh in July had set up a committee under tax expert Parthasarthi Shome to address concerns of foreign and domestic investors on GAAR. The committee had already submitted its draft report to Chidambaram on September 1. The Indian Government had later expanded the scope of the expert committee on GAAR to include concerns of all non-resident tax payers. The Parthasarathi Shome panel, looking into the taxation issues relating to GAAR (General Anti-Avoidance Rules), is likely to submit its final report to Finance Minister P Chidambaram on Monday. As a step towards reassuring global investors, the committee in its draft report had recommended postponement of the controversial tax provision by three years and abolition of capital gains tax on transfer of securities.

In order to address the concerns of Mauritius-based investors, the Shome panel had suggested that the provisions of the GAAR should not be invoked to “examine the genuineness of the residency of an entity set up in Mauritius”. The draft had further said that the government should retain the provisions of the CBDT circular, which was issued in 2000, on acceptance of Tax Residence Certificate (TRC) issued by the Mauritius. Besides, it had suggested the government should issue a circular to clarify GAAR provisions along with illustrations. The Committee had recommended that GAAR be applicable only if the monetary threshold of tax benefit is Rs 3 crore and more. In view of the concerns expressed by investors, the government had already postponed implementation of GAAR by a year to April, 2013. The proposal was introduced in Budget for 2012-13 by the then Finance Minister Pranab Mukherjee.