Despite deteriorating fundamentals of the Indian Economy amidst CBI raids on Industrialists, the Indian StockMarket is Rising and is inches away from the all time high. A simple analysis of the performance of stocks and the contribution to the market movement over the past 14 months (ever since the Paralysed Government started its reforms program) shows that the bulk of the market’s performance has been driven by stocks that have very little to do with India. In fact, the sharp Rupee depreciation (9.8% over this period) is one of the prime drivers of the performance of companies with overseas or US Dollar revenues and earnings; these stocks have largely contributed to the strong market performance.
After a brief period of out performance in the immediate months after the announcement of ‘reforms’, many ‘reform’ stocks (in banking, energy, infrastructure, utilities) delivered flat-to-negative returns. Banking stocks performed strongly of late on partial unwinding of the extraordinary liquidity-tightening measures undertaken by the RBI in July-August 2013.
Valuations are quite expensive for defensive consumer stocks (already discounted FY2015E EPS) and fair for IT and pharmaceutical stocks. The banking sector has performed of late as certain banks continue to ‘dodge’ NPA problems and the market is playing on a global ‘risk-on’ trade, driven by a consensus view that the much-feared US Fed tapering has been postponed well into CY2014. The energy sector continues to see sporadic reforms but lack of clarity on (1) the path to eventual deregulation of oil and gas pricing and (2) a subsidy-sharing system continues to dissuade investors from looking at this large sector favorably.
BSE-30 Sensex at 21,000 is already quoting at 13.9X FY2015E free float EPS which is expensively priced to the rampant slowdown in the Corrupt Congress Government’s Agenda driven policies which has got nothing to boost the Economic Cycle.