MUMBAI Dec 6 A rally in India shares to a
record high is masking an underlying weakness - the market has
been lifted by just a handful of stocks of exporters reaping the
benefits of a slump in the rupee.
When Indian shares powered to a record high in January 2008,
it marked the peak of a six-year rally in an economy with
enviable average growth of 9 percent that was hot on the heels
of China. India was tipped as the next Asian powerhouse.
This time around the disconnect with the economy could not
"The economic environment of 2008 and now is very
different," said Aneesh Srivastava, chief investment officer of
IDBI Federal Life Insurance in Mumbai.
"Then, we had strong economic growth and strong earnings
growth. Today, the currency is a challenge. We have policy
paralysis, an economic slowdown, and global risks," he said.
India's economy is growing at its weakest pace in a decade
and the currency, which slumped to a record low in August, is
barely out of the sick bay. Consumer spending and corporate
investment is weak and a minority coalition government is
paralysed as it stumbles towards national elections in the face
of an invigorated opposition under a business-minded leader.
Yet, India's benchmark stock index, the BSE, rose
on Nov 3 to a record high and is on the cusp of reaching a new
peak as foreign investors pile into the market targeting India's
exporters who are benefitting from the weakness of the rupee.
They have made net purchases of $17.6 billion so far this
year, making India the number one recipient of overseas stock
investment in emerging Asia, Deutsche Bank figures show.
The result is that since the rupee and stocks hit their lows
in late August, the BSE index has risen 20 percent off the back
of the foreign money and despite heavy selling by sceptical
The rise in the BSE index, widely known as the Sensex, has
been fuelled almost exclusively by exporters such as software
services provider Tata Consultancy Services Ltd and Sun
Pharmaceutical Industries Ltd, both of which are up
close to 60 percent this year.
Information technology and pharmaceutical exporters have
benefitted from an improving outlook in the U.S. economy and a
dollar earnings stream. The rupee, which at its record
low had fallen 20 percent this year, is now down 11 percent
since the start of 2013.
Illustrating the rupee effect, the BSE index is Asia's
fourth-worst performer in dollar terms, having fallen 3.9
percent since the start of the year.
Just 10 stocks in the 30-member Sensex have outperformed the
index itself this year and the six top risers are all exporters.
HAS THE MARKET PEAKED?
Anusha Mannick, a fund manager at Rogers Capital in
Mauritius, said investors like her have been attracted by
relatively low valuations and a weak rupee that made shares
Thomson Reuters Streetsight data shows Mannick's fund
emphasised investment in pharmaceutical companies, including
drug makers Strides Arcolab Ltd, Glenmark
Pharmaceuticals Ltd and IPCA Laboratories Ltd
Further signs of improvement in the U.S. economy, such as a
pick up in the jobs market seen in data this week, could spark
more gains for exporters.
But some investors worry the upside potential for India is
now waning after such a strong run up. Both Tata Consultancy and
Sun Pharma hit record highs in October, but have each fallen
around 12 percent since.
Other markets may also start to look attractive.
The MSCI India IT sub-index trades at 21
times earnings forecasts for the year ahead, well above the 12
times for the equivalent index for Asia-Pacific countries
outside of Japan and 18.4 globally
The MSCI health care sub-index, which
includes pharmaceutical companies, is starting to look similarly
Another factor that could weigh on Indian stocks is a
reduction in the U.S. Federal Reserve's monetary stimulus.
Fed tapering fears earlier this year hit India badly, with
overseas investors selling a net $3.7 billion of shares from
June through August.
"I think we will see funds moving out of emerging markets
like India to the developed world on Fed tapering," said
Mannick, of Rogers Capital.
"I think export-based stocks gaining on just a lower rupee
would not play for long, so therefore there would be some profit
booking," she said.
THE INDIA STORY
Having made a record $11.7 billion in net sales between
January and November, domestic investors are showing little
inclination to take up any slack if foreign money pulls out.
A lack of fresh economic reforms to drive fixed-asset
investment has weighed on India's economy for two years. In the
fiscal year to March 2013, growth dropped to just 5 percent, its
lowest pace in a decade and is expected to slow further in the
current fiscal year.
Shares of companies tied to India's domestic economy have
tumbled this year, some quite badly and the earnings outlook for
non-export blue chips remains poor, analysts say.
India's biggest power equipment maker, Bharat Heavy
Electricals Ltd, is down 25 percent this year after
hitting its lowest levels in about eight years.
State Bank of India, partly owned by the
government, has dropped more than a fifth as lending demand
cooled. In November, it reported its steepest quarterly profit
fall in more than two years.
"A new economic cycle is starting, but nobody has the
courage to buy meaningfully into economically sensitive sectors
like capital goods, construction, realty, or public sector
banks," said Samir Arora, a fund manager at Helios Capital
Management in Singapore.
Many potential buyers are pinning their hopes on a victory
by the opposition Bharatiya Janata Party, widely seen in markets
as being more business friendly, in general elections due by
A key indicator of its strength comes on Sunday when India
will post results for a handful of state elections.
Still, national elections are months away, and could yield a
divided mandate and a weak coalition government, the result
investors fear most.
With such uncertainty, domestic investors find it hard to
buy into the rally.
"A structural bull market cannot be there in an environment
which is so challenging," said IDBI's Srivastava.
"Structural bull markets need earnings and macro-economic
support. So if markets go higher it will be an unsustainable
high, if expectations are not fulfilled accordingly."