Markets are poised at an all time high, with a decent surge of around 1,300 points in a span of four months in Nifty. What’s the reason behind this sudden surge? What is driving the market, despite several headwinds such as the crude oil situation and falling exports from India?
Let’s take rising crude oil prices first. There has been no inherent growth in global crude oil consumption. The crude oil economy is growing at the rate of 1 per cent in the global market despite of recoveries everywhere, including the 4.1 per cent growth in the US economy. High crude prices will not be able to sustain for too long. Currently, higher crude prices, that are hurting the Indian economy, are largely because of the oil embargo on Iran and due to OPEC (Organisation of the Petroleum Exporting Countries) taking advantage of the situation.
The high price on crude oil products is eventually passed on to consumers. The way I see it—the prices of petroleum products are currently same, as they were in 2014-15, however, the spending power of people has increased. The per capita income has increased from $1,631 in 2014 to $1,753 in 2018. Thus, the increase in oil prices is not pinching the consumers anymore.
The growth story is still convincing investors on account of rise in infrastructure spends.
Then there are exports, which are not picking up due to global factors. The US is trying to focus on its domestic economy for manufacturing. Although expecting that the US buys from India while India does not import from the US is incorrect. India is trying to setup projects such as Make in India to minimise imports. Similarly, other countries are trying to replicate such projects to boost their own production and become self-dependent, thereby reducing imports. The potential of double-digit growth is driving India to a strong position in the world economy and investors are comforted and believe that the growth story is intact.
So, we have seen positive inflows from both domestic and foreign investors during 2018. Furthermore, the system is receiving back inflows that were unavailable, blocked or non-performing on account of structured measures taken by the government. Many asset reconstruction companies have started operations and they are buying assets that are auctioned under NCLT (National Company Law Tribunal). Because of this, investors are convinced that while the government is taking these steps and the NPA money is coming back in the system the economy will only grow.
The fall in the markets during January and in June was due to global headwinds. Around more than 70 per cent of midcaps are fetching attractive valuations compared to the valuations prevalent 7-8 months ago. Many large cap companies did not participate in the last rally due to languishing valuations for a long period. Most of them had conceived larger projects but were restricted on the drawing board. Those projects have now been realised. For example, Reliance India Limited has capitalised 2.5 lakh crore while Jio is now a reality which until now was under scepticism.
The growth story is still convincing investors on account of rise in infrastructure spends and awarding of projects in roads, ports etc. Similarly, investments in power equipment developments, renewables, fibre optic cables, auto, etc. have been on the rise.
Investment in the automobile sector is important. The sector is expected to attract an investment close to Rs 1 lakh crore. There are opportunities in road infrastructure and river-linking projects as well. Put together, they will attract $1 trillion into the Indian economy by 2021. All this is clearly driving the confidence of investors.
Positives spelt out herein are driving investors’ money in India through both primary and secondary routes. Many funds have started putting money into the country through QIPs or IPOs. Getting on to the bandwagon of the $16 million purchase of Flipkart by Walmart, many NBFCs and Fintech companies are attracting global funds as well.
Indian market sentiments are driven by index movement. But hardly 8-10 stocks are driving the index, for example: the HRITHIK stocks, as they have been abbreviated by some. These include: HDFCs, RIL, INFY, TCS, HUL, IndusInd Bank and Kotak. We are also witnessing participation by NBFCs such as Bajaj twins, ITC, etc. Even SBI has participated in this rally largely because they were on the wrong side of the valuations for whatever sentiments prevailed in the past month. Thus markets are catching up and fears receding. Markets are balancing the possibilities along with opportunities.
(The author is MD, KRChoksey Investment Managers)