Achhe din at the Sensex?

When Prime Minister Narendra Modi promised during the election campaign, “Ache Din Aane Wale Hain”, we’re not sure what he exactly had in mind. The planks of economic stability and growth were the foundations of NDA’s election manifesto. And the way the stock markets are moving, it looks like the electorate’s dreams are being realised. And good cheer for the investors – both foreign and domestic.

Last week there was heartening news of an upward shift in the GDP graph. The economy registered a growth rate of about 5.7 percent in the first quarter of this fiscal year (Apr – Jun 2014). This has been the fastest growth rate anytime in the past few years. The real GDP growth of the last quarter of the previous fiscal year (Jan – Mar 2014) was 4.6 percent.  By end June, the current account deficit (CAD) also took a sharp dip to USD 7.8 billion which translates to  1.7 percent of the GDP. The burgeoning growth rate is believed to have been a direct result of key policy changes implemented by the NDA government, including a boost to the manufacturing sector and easing the FDI norms. The confidence of investors has returned and inflation seems tame at this point in time.

The story of six milestones

News of the GDP revival and the narrowing current account deficit in the April – June 2014 quarter has brought much cheer to the stock markets. On September 1, 2014, the National Stock Exchange’s benchmark stock market index, the S & P CNX Nifty hit a historic all-time record when it breached the 8,000 mark. A day later, on Tuesday, the S&P Bombay Stock Exchange Sensitive Index (BSE SENSEX) moved over the 27,000 mark to close at 27,019 points. Within the past fortnight, the BSE SENSEX gained a phenomenal 700 points. The astounding journey of the BSE SENSEX can be mapped against the fact that on March 24, 2014 when it hit 22,000 points for the first time, market analysts had been apprehensive about the bull run. Six months and six record milestones later, investors are optimistic that the markets have a lot of steam left before they falter.

Upbeat predictions

Following the historic records at the stock exchanges, brokerage and investment firms such as Morgan Stanley have been predicting higher targets for the indices. Morgan Stanley says that if the NDA government continues with its policy of decisive and forceful action and puts economic growth on top of its agenda, the Sensex is likely to scale newer heights and will possibly rest between 28,800 and 33,900 points by June 2015. There is a 40 percent likelihood of this coming to pass, the firm says. Motilal Oswal predicts that the NIFTY will hover between 9,000 and 10,000 and the SENSEX around 31,000 by the time next Union budget is announced.

Looking at the predictions from a valuation perspective the price-to-earnings (PE) ratio of the BSE SENSEX (12- month) is at 18.61x. The 10-year average PE ratio for the index is 18.81x – higher than the 12-month ratio, indicating that the earnings potential of the index is still considerable. Besides, with a growth in the overall economy, the earnings and growth of the corporates will ensure that the earnings are at par with stock valuations. The Reserve Bank of India’s steady battle to tame inflation is also likely to make the valuations worth the earnings.

Correction round the corner?

While such a bull run at the stock markets brings natural jubilation, analysts have advised caution. A multi-year bull run cannot come without natural corrections. The last multi-year bull run India saw was between 2003 and 2007. While the markets moved up throughout 2003, 2004 remained rather flat. While 2005 saw a 50 percent upward move without any correction setting in, the next year saw a 33 percent correction. In 2007 as well there was a correction after a 50 percent upswing. Investment in the market requires much in-depth research and discretion.

Which way for retail investors?

This is a good phase for retail investors, analysts say. The potential for growth in earnings is high. A study of the sectors and the individual stock in comparison with competition is essential before retail investors decide to accumulate. Buying during dips and correction phases is highly advisable. Retail investors are also cautioned against unethical trading practices or brokers who promise quick and meteoric rise in earnings. Caution and learning are always watchwords at the share market. Global influences and the volatile price of crude are also factors that will influence domestic equity markets. Any retail investor approaching a goal such as retirement or a child’s college admission may well be advised to shift bulk of the investments into safer investment instruments. Dividing equity investment sums into direct and SIP forms will also mitigate risks to an extent.