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Will Modi Magic Boost Markets Again?

Madhurendra Sinha has some good tidings for the investors after quite a few months that turned out to be lean

re is still hope Modi on national horizon had done the trick. Yet, stocks are now. Madhurendra Sinha
Publish Date: Jun 14 2016 4:44PM | Updated Date: Jun 14 2016 4:44PM

Will Modi Magic Boost Markets Again?

Two years ago markets had surged. The advent of Narendra becoming sluggish once again though there is still hope Modi on national horizon had done the trick. Yet, stocks are now. Madhurendra Sinha has some good tidings for the investors after quite a few months that turned out to be lean 

It was the winter of 2013 when Gujarat CM and BJP’s prime ministerial candidate Narendra Damodar Modi started wooing the Indian voters. Boosted by his magical presence and influenced by his charisma, the Indian stock markets too started coming out of the woods. Soon there was a rush to buy stocks not only among the Indian buyers, but FIIs too. As a result, BSE started making new records and touched a new high shortly after Narendra Modi became the PM of India. On March 4, 2015, the BSE Sensex touched the magical figure of 30,000! It was the result of a kind of euphoria created by Modi’s dynamic personality, unprecedented campaign and the promise of ‘Acche Din’ that encouraged investors to put their hard-earned money into stocks. Modi’s promise of Achhe Din and development, in fact, took the markets to zoom past that magical figure which was not even thought of a few years ago.
Stock markets, especially the Indian markets, run more on sentiments rather than bare facts. This was the exact reason why the Sensex started sky-rocketing. There was nothing impressive about corporate results or the overall economy. Prices of some essential commodities like oil and pulses went up considerably, giving a bad name to the Modi-led Government. PM Modi could not start the kind of reforms he wanted. As a result, the Sensex started sliding down. 
The Indian stock market, which was one of the best-performing markets in the beginning of 2015, became one of the weakest markets afterwards. India’s bellwether Sensex jumped 30 percent in 2015. While China has continued to surge this year as well, 2015 has not been as kind to India as the Sensex is not doing as good as expected.
Experts say many things as for why the stock market lacks the same kind of enthusiasm which marked the appointment of ‘business-friendly’ Narendra Modi as India’s Prime Minister two years back. Foreign analysts were of the opinion that the Indian tax authorities first surprised them unpleasantly by surprise tax bills worth billions of dollars. Obviously many FIIs stopped buying Indian stocks because of uncertainty about the taxes. This uncertain behavior of taxmen has unnerved FIIs. Though Finance Minster Arun Jaitley has done his best to allay the fears of foreign investors, but they are still not convinced.
More important is the fact that corporate earnings in India are very bad. There has been little sign that the Modi mojo is giving a helping hand to company profits. Kotak Institutional Equities has projected profit growth of less than 3 percent for the 30 companies in the Sensex for the year ended March 31. If its prediction proves correct, that would make it the worst year, in terms of growth, in five years.
In the past whenever RBI announced rate cuts, markets used to go in frenzy. This year despite Indian central bank reducing interest rate twice, stocks did not move in the right direction. The basic reason being banks did not pass this benefit to customers initially. They only started cutting their rates earlier this month.
Another factor was that the Government was not spending much. With corporations still struggling with debt, everyone is looking to the Government to boost spending, but its hands were tied due to weak tax revenues. There is little extra money to invest after the Government shells out all the money it spends on social services, analysts say.  Though the Government has cut down substantial amount it spends on fuel subsidies, it still pays a large amount for food and fertilizer subsidies.
But the biggest reason being there was little or no demand from rural areas because of two seasons of insufficient rains. Freak heavy rains in March and the falling prices of commodities have hurt rural incomes, depressing demand for everything from bikes to soaps. 
Besides external factors, there were two global factors. First was Chinese economy’s downward journey. Its growth rate is now slowing down and the country is facing shortage of demand which has forced the Communist government to start devaluation of its currency. It has hurt the Indian economy also by way of impacting its exports. Exports are falling since the last 16 months and that has hurt our manufacturers and producers. 
Another factor was the US central bank’s uncertain stance on rate revision. This has created a sense of fear among investors. An increase in rates can force FIIs to rush back to the US. This may prove costly to the Indian markets. 
Present scenario
Interestingly, in April sentiments started turning positive with strength in global markets. Indian indices seem to be headed for better days in the near future. In the first week of April a rally of 4 percent has indeed taken many market participants by surprise and many will thank their luck that stocks are moving up after last month’s decline. 
In this month of May also markets have started showing signs of recovery and a little boom-like situation has prevailed. The euphoria could be attributed to a variety of reasons, but consensus seems to hinge on two of them – better-than-expected macro numbers hint at 'Achche Din' for the economy. After spending three months in the negative territory, factory output finally rose on the back of a strong performance by mining and electricity sectors. February IIP stood at 2 percent versus (-) 1.5 percent in January. Another reason for cheer was that the seasonal rainfall during the forthcoming monsoon is likely to be 106 percent of the Long Period Average (LPA), according to IMD.
Some experts see some signs of recovery in the market and the last two months have seen some kind of rally, but clear evidence of that are yet to be seen. One will have to see the earnings growth before determining whether it’s a rally or not. Markets may remain in consolidation for a couple of months before taking into account global events and of course the progress of monsoon. There is not much room for multiples to expand. The market has rallied in the past two months and valuations have moved up, which will come out as some sort of resistance. Valuations are not as cheap as they looked two months ago. 
The biggest solace for the markets is that the most-awaited monsoon is likely to be normal this year, which will boost not only the economy but people’s earnings as well. A normal monsoon means millions of happy farmers and more money in their pockets. This in turn may boost the demand of many things in the country.