The government on its part has set the ball rolling on the reforms front. Some reform measures such as deregulation of diesel, hike in gas price and more liberal rules for FDI in construction were announced by the government recently. However a lot still needs to be done in terms of easing coal shortage and expediting the resolution of environmental and land issues plaguing infrastructure projects. Unless these structural issues are deftly addressed, the turnaround in the financial health of infrastructure companies will continue to remain a distant dream.
And the market seems to have sensed the premature rally in infrastructure stocks witnessed in the start of the year. This is evidenced by the fact that the BSE Capital goods index yielded huge returns of 43% for the first five months of the year that tapered off to a mere 8% since then. Pharma and IT stocks have been gaining momentum, on the back of an improving US economy that has bettered their prospects for higher export revenues. Since June 2014, pharma stocks have appreciated by 40% compared to the broad index that posted gains of 13%. Even IT stocks have gained by 27% during this period.
The stock markets have been rallying since the start of 2014. But the initial scramble to cash in on the big ticket reforms-led infrastructure play is giving way to pragmatic optimism. In the absence of radical reforms, investors have realized that the turnaround in infrastructure will be a long-drawn out affair. Thus investors are now flocking to safer bets in pharma and IT companies that have their fortunes tied up with the improving US economy.