Narendra Modi govt's reforms to propel Sensex to 33,000 by Dec 2015?

The buoyancy in the equity markets has been unprecedented since the formation of the new government last year on May 16. The promise of business-friendly initiatives, fewer regulatory hurdles, and emphasis on growth resulted in positive investor sentiment that enabled the market to touch record highs in the past one year.

Since the formation of the Modi government, the key benchmark index Sensex surged 14 per cent to 27,507.30 on May 11 this year. Meanwhile, it touched a closing high of 29,681.77 on January 29. The NSE Nifty index gained 15 per cent during the same period.

Sensex movement during the past one year

In the BSE 100 index, share price of Bharat Forge surged the most (168 per cent) to Rs 1,227.85 on May 12 this year from 457.35 on May 16 last year. It was followed by Ashok Leyland (168 per cent to Rs 72), Bosch (102 per cent to Rs 21,470), Lupin (82 per cent to Rs 1,749) and UPL (72 per cent to Rs 489).

Sandeep Sharma, senior research analyst, Hem Securities, says, "Sentiments have changed drastically on a positive note since the formation of the Modi government in May 2014, with economists raising growth forecasts for the world's second-most populous nation. The election results proved to be an inflection point for India's story, the decisive election outcome suggests the new government will be able to implement reforms at a faster than previously expected pace. Formation of the Modi government has heralded the birth of a new bull market in India."

The International Monetary Fund (IMF) raised its forecasts of India's economic growth in March, saying it now predicts gross domestic product will expand by 7.2 per cent in the current financial year against 5.6 per cent as predicted earlier.

Vinay Khattar, associate director, head of research, Edelweiss, says, "In the past one year, more retail investors have come into the market on high expectations of fiscal policy reforms. In fact, we saw the bulk of inflow in equity funds in 2014 come in the second half of the year. We also saw a profusion of 100 close-ended equity schemes launched, which suggests greater confidence in market stability in the near and long term."

Since the election results, foreign institutional investors (FIIs) remained net buyers in the capital markets, buying shares worth Rs 98,639 crore till 12 May 2015.

The Recent Fall

However, in the last few weeks, the BSE Sensex tanked around 7 per cent to 26,877 on May 12 from 28,879 on April 10. According to market experts, corrections in the bull market can be attributed to a couple of factors which includes controversial handling of the minimum alternate tax (MAT) by applying them retrospectively on FIIs, perceived inaction by the Modi government on economic and legislative agenda, and depressed global commodity prices.

On the entry of bears in the market, Vinod Nair, head, fundamental research, Geojit BNP Paribas Financial Services, says, "A culmination of factors have led to the recent sharp correction. The recent phase of range-bound correction is led by FIIs, in spite of setting up a high-level committee to decide on the MAT issue. Factors such as increase in Europe bond yields, outperformance by other emerging markets and currency depreciation is impacting global inflow. Besides these, when the domestic earnings are downgrading and outcome from Parliament session is shaky regarding the Goods and Services Tax (GST) and Land Acquisition bills, market is not taking it well."

However, Khattar, says, "It is too early to assume there is any major dent in confidence about the new government's ability to turn around the mess we have been in for the last few years. We are one of the 10 largest economies in the world and we expect it will take at least a few months before the numbers begin to change and the turbulence abates."

Outlook

At present, the Sensex is trading at price-to-earnings ratio of 19.87 against its five year average of 17.99. According to the Bank of America Merrill Lynch, the Modi government has done a few reforms, typically the impact of reforms is felt with a lag.

However, domestic equity markets may remain subdued in the ongoing quarter due to slow quarterly numbers, rich valuations and continuation of earnings downgrades. On the other hand, the investment bank is positive on the long-term story as it believes the BSE Sensex can touch 33,000 levels by the end of December 2015.

Khattar of Edelweiss, says, "We expect market could continue to remain in pain in the coming months as it re-establishes the bottom and consolidates before further uptrend. So despite a degree of panic we are seeing, we believe that our optimistic long-term hypothesis will hold fast. There has been a heavy commitment to the planned infrastructure spend, coal production numbers are increasing, defence and road orders are beginning to materialise, and eventually we believe over the next few months, valuations would become compelling for the uptrend to begin again."