The markets scaled a new high on 1st Nov 13 after almost 5 years and 10 months. However, there is a stark difference between Jan 08 and November 13. Jan 08 was marked by exuberance, euphoria, retail participation, rising oil prices, failing behemoths in the West and a relatively stable and a growing Indian economy. The present sentiment in the market is one of skepticism, concern over Fed tapering, gush of liquidity, absence of retail investors, relatively stable economies in the West but a much lower growth rate in the Indian economy.
The new high has perplexed the investing community and came barely 2 months after all analysts predicted fresh lows for Nifty on the back of falling rupee, rising Current Account Deficit and a fiscal deficit target that the government seemed all set to miss. The question that is being debated in the investing community is whether Nifty will make fresh highs or will it retreat to the old lows?
The economy grew at a brisk pace of 8 – 9% during the period 2003 to 2007. The economy was growing as a result of reforms initiated by the NDA Government that had taken over a weak and faltering economy marred by high inflation and low growth rate. UPA – 1 failed to bring in any economic reform during its tenure except for the Nuclear deal that it signed which has failed to take off even today owing to concerns over India’s nuclear liability law. UPA – 2 also failed to usher in any reforms for almost 3 and half years despite the huge expectations from it when it took over in 2009. We were staring at a rising fiscal deficit, uncontrollable Current Account Deficit, high inflation, rising government debt, policy paralysis. It was no wonder therefore that the growth rate plummeted and the global factors were not very helpful either.
To be fair, the government decided to bite the bullet in September 2012 when it raised diesel prices by Rs. 5, capped subsidy on LPG and created a red line for fiscal deficit target. It followed up by opening FDI in Multi brand retail, easing norms for Single Brand, launching DBT, raising the price of Gas to $8.4 from $4.2 per million british thermal unit, forming a fast track committee to clear big ticket infrastructure projects etc. It further opened FDI and / or raised the sectoral limits in a host of sectors including Defence, Aviation, Telecom and eased the norms for FDI in multi brand retail. FDI has increased by 35% to $13.6 Billion during Jan to July 2013 vs. similar period last year. Due to relaxed policy regime, we have seen some big ticket FDI investment clearances such as $2 billion dollar from IKEA, Jet Etihad Deal for $340 Million and Tata – Singapore airlines to name a few. Vodafone has also filed an application to invest $1.7 Billion to buy minority stake in Vodafone India. Big ticket investments in Oil and Gas sector are also expected to be announced over the next couple of quarters.
Current Account Deficit which widened to 4.8% of GDP in 2012-13 is expected to contract to less than 3.7% in 2013-14 as a result of rising exports and a severe clampdown on import of Gold. Falling rupee, improved western economies and higher discretionary spending has boosted exports and softened CAD. Green offshoots of the economy are becoming visible. IIP numbers reported 22% growth in Capital Goods in July 13 though it was followed by contraction in August. Core Sector has reported a growth of 8% in September and cement sector which is to a certain measure a pulse of the economy has surprised with a growth of 11.5%. A good monsoon, rising rural incomes should boost the consumption and FMCG companies are already investing heavily in the supply chain of rural areas.
On the flip side, inflation continues to be high. RBI has raised repo rate in the recent monetary policy and high interest rates discourage revival of capex plans of corporates, consumption is sluggish and GDP Growth rate is yet to pick up. However while Sensex crossed the alltime high of 21206 that it made in Jan 08, Sensex EPS is up by 55% between Jan 08 and now. Sensex valuations are therefore 33% lower than where they were in 2008. Fundamentals are better than where they were a year ago. In the view of Raghuram Rajan, the new RBI Governor the economy is close to bottoming out and should start looking northwards. Bull Run tends to start when pessimism is running high, markets are moving from strength to strength and there exist green offshoots of recovery while the economic recovery has not fully taken off.
While there exist conditions for revival of bull market, time is yet to cast its dice.