Will this bull run in Indian stock markets continue? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Will this bull run in Indian stock markets continue? 

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In this issue:
» Not a great start for Indian Auto
» The challenges that Infosys faces
» US needs to deal with income inequality
» Can Modi revive the fortunes of public sector banks?
» ...and more!


00:00
 
Now that Narendra Modi has been sworn in as the Prime Minister of India and has announced his cabinet of ministers, all eyes are on the government and the policies that it will announce in the coming days.

Indian stock markets have obviously given big thumbs up to the Modi government given the huge rally in the past few months. Does this mean that India is in a bull market? Mark Mobius, executive chairman of Templeton Emerging Markets, certainly seems to think so. What more, in an interview with the Economic Times, Mr Mobius believes that this bull market is likely to continue as more foreign investors pour money into the economy.

However, the reason why investors are so gung-ho about the Modi government is because of its emphasis on growth and development. Thus, there are huge expectations from the new government to deliver big time.

The Indian economy is still weak. Inflation is high, interest rates are firm and growth in manufacturing, infrastructure and industrial sectors has remained sluggish because key projects have been stalled. These issues need to be urgently addressed.

The other key problem that needs to be tackled is cutting down the fiscal deficit. In this regard, Mark Mobius is of the view that there has to be a major relook at the social expenditures. The UPA government had emphasised a lot on social welfare programs. These unfortunately did not deliver results because of poor execution. More importantly, these programs became vehicles for rampant corruption. Thus, one of the things that the current government can do is to cut down those social expenditures which are non productive and reallocate funds towards infrastructure.

Indian stock markets have rallied on hopes that the Modi government will bring about the much needed change that will spur economic growth and boost corporate earnings. So any faltering there will obviously bring in disappointments. There is no doubt that given the kind of challenges that the Indian economy is facing, what it needs is a strong leader with the political will to make things happen and in that sense Mr Modi fits the bill. Besides focusing on policy making, it will be interesting to see how the current government also tackles bureaucracy that is inherent in India's political system as well as opposition from other political parties.

We believe that the current government does have what it takes to bring about a difference in the fortunes of the Indian economy. There is still ample scope for India to grow provided it overcomes a host of challenges. However, investors need to temper their expectations because this change will not take place overnight. In the meantime, the disciplined approach that one needs to follow in the world of stock investing will not change. Rather than get carried away by the rally and predict what foreign investors will do next, investors will still reap strong returns provided they stick to investing in those companies that have robust business models and are available at attractive valuations.

Do you think that Indian stock markets are currently in a bull run? Do you expect this rally to last? Let us know in the Equitymaster Club or share your comments below.

01:26  Chart of the day
 
The Indian auto sector could very well be relieved to put a rather challenging FY14 behind it. But the industry has not exactly begun the current fiscal on a great note either. Indeed, certain segments of the auto space such as passenger vehicles and commercial vehicles continued to report decline in volumes in the month of April 2014. For commercial vehicles at least, it is apparent that pick up in volumes will only take place once the manufacturing and construction sectors see a revival. Two wheelers, in the meanwhile, have done quite well during the month. Growth was largely led by scooters which saw a robust 26% YoY growth in volumes. Growth in motorcycles was also relatively decent at 8% YoY. Growth in exports was largely driven by two wheelers and commercial vehicles.

Not the greatest of starts for the Indian auto sector
*Passenger vehicles, **Commercial vehicles

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02:01
 
These are difficult days for India's second largest software firm, Infosys. The company is grappling with multiple issues of employee attrition, client retention as well as below par growth. When alarm bells were sounded over these issues last year, the company brought back from retirement, founder N.R. Narayana Murthy. It has been one year since Mr. Murthy returned as executive chairman on the board. Have things turned around for the better? The answer is both yes and no.

Infosys has certainly managed to stop large clients from leaving. Over the last one year, Mr. Murthy has personally visited all of the company's top clients. His efforts combined with an aggressive pricing policy have enabled the company to win a few large software contracts. But this will not be enough. As Mr. Murthy has admitted himself in a letter sent to the company's employees, Infosys still has a long way to go before it can contain the loss of employees at the mid-management level. In addition to this, the hunt for a new CEO has also temporarily distracted the company. As of now, investors should adopt a cautiously optimistic stand with respect to the company.

02:33
 
The latest rankings for the most competitive economies in the world are out. And not surprisingly, the US finds itself on top of the list. However, there's a section of people in the land of Uncle Sam that's not quite celebrating this achievement. And this group is nothing but the vast number of people who are unemployed and also the ones whose wages haven't gone up in real terms for many years now. What explains this dichotomy of sorts? Well, experts argue that it is the income inequality that is making the US a paradox of sorts.

One theory goes so far to suggest that it is in fact the cut throat capitalism in the system that's responsible for this state of affairs. We would beg to differ though. Capitalism cannot be both a curse as well as a boon at the same time. The problem with the US perhaps stems from the fact that while real capitalism as it should be practiced is on the wane, its place is increasingly being taken by crony capitalism. And it is this sort of capitalism that's harming the economy by distributing profits amongst the elite while apportioning losses to the larger section of the society. Thus, if it has to have any shot at reducing the income inequality, it will have to encourage real capitalism and let firms and people pay for their mistakes. The bailout culture is not going to do the economy any good over the long term.

03:12
 
If the rest of the world is looking at an inflection point in emerging markets' particularly India's growth rate, here's why...The rich world is far from recovery from its state of anemic growth. The US Federal Reserve may want us to believe that America's growth rate is set to move several notches higher. However, the facts point towards another direction! As per Economist, the US' GDP grew at an annualised rate of only 0.1% in first quarter of 2014. The Eurozone was no better, with GDP growth of 0.8% being half the expected pace. There are claims that the economic weakness in the US was temporary; due to bad weather conditions. Plus the economies of Britain, Germany and Japan have seen brief spurts. However, the economic stagnation in Italy and France, is becoming more entrenched. Government bond yields in the US, a barometer of for long term growth and interest rates have fallen sharply. The yield on ten-year Treasuries, at 2.5%, is 0.5% lower than it was at the end of 2013. We do not think keeping interest rates near historical lows is the solution to the problems in the West. In fact, as the Economist suggests, not just India and the US but the global economy needs politicians who can distinguish between budget profligacy and prudent spending. Moreover there needs to be consensus and will to push through unpopular reforms!

03:46
 
Ever since the US central bank went on its money printing spree, many have been predicting the possibility of the US dollar losing value. The basis for this was the increasing supply of the currency. However, as you would have noticed, that has not really been the case; the dollar has remained quite strong against most currencies. Why has this been so? Well... it's largely to do with the weakness in other economies leading to their respective currencies depreciating all the more. And when it comes to finding safe havens in this space, countries may not be willing to hold their foreign reserves by buying currencies of relatively weaker economies. This has been the case during times of economic turmoils in the past - and this time it's no different believes Eswar Prasad, an economist and professor of trade policy at Cornell University. As reported on moneynews.com, Mr. Prasad believes that Europe is unlikely to put money in Japan or China; same would be the case when reversed. And given the uncertain times, holding foreign reserves would be essential for varied reasons. So with the US dollar being the only option, it is likely that the US dollar will remain strong in the near future. This nevertheless does nothing to preserve the greenback's intrinsic value in our view.

04:13
 
Quite unfortunate! But almost three-fourth of the lending pie in the system is dominated by public sector banks. And this set is also the highest contributor to the systemic bad loans. Well, the Modi-led rally has given a new lease of life to the yesteryears' underperformers. But we still have no reasons to cheer. Because this momentum is quite unsustainable! For the public sector banks are reeling under pressures of bad-debts pile up. And the huge write-offs of non-performing loans and the resultant provisions might soon wipe off their core equity. The state of affairs at State Bank of India is a case in point. Therefore, capital sufficiency is indeed a daunting task for the new government in power.

Most of the public sector banks today have been the victims of high inflation and high interest rates. Borrowers have let them down. Bad loans continue to soar. As a result, credit growth has been curbed. Hence, to get them back to lending again, the government will have to pump in huge sums. Only then will these banks be able to take advantage of the anticipated economic revival. Otherwise the positive sentiments driving the valuations of these public sector lenders would fade off sooner than later. And fundamentals will continue to lag behind!

04:45
 
The Indian stock markets, continued to slip in negative territory on profit-booking. At the time of writing, the benchmark BSE-Sensex was down by 236 points (-1 %). Barring pharma and IT, all sectoral indices were trading in the red. Realty and power stocks were the biggest losers on the bourses today. Most of the Asian Indices were trading in the red with China and Singapore being among major losers. However the Japanese market was trading in the green. European markets have opened the day on a positive note.

04:56  Today's investing mantra
"To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses: How to Value a Business, and How to Think About Market Prices." - Warren Buffett
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Equitymaster requests your view! Post a comment on "Will this bull run in Indian stock markets continue?". Click here!

2 Responses to "Will this bull run in Indian stock markets continue?"

RK BALASUBRAMANIAN

May 27, 2014

Sir,

Market's bull run will continue 300+ nifty

small cap & some mid cap stocks will perform well

thanking U sir

Like 

Awni Ranjan

May 27, 2014

So far all political events are not only as per the market expectation rather these events & happenings have beaten the market. The litmus test of PM Modi's governance is likely to be known in a month or two and till such time there seams to be no downside. And, profit booking at regular intervals is inherent market need. So, wait and watch and enjoy the ride.

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