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Business News/ Money / Calculators/  Economic indicators back stock markets
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Economic indicators back stock markets

Investors should not try too much and stick to quality stocks

Hemant Mishra/MintPremium
Hemant Mishra/Mint

After a rough patch, the Indian economy is slowly coming back to life. Though it is still early days, the incoming economic signals have been encouraging. After clocking a sub-5% growth for two consecutive years—first time in the last 25 years—the economy in the current fiscal, as noted in the Economic Survey 2013-14, is expected to grow between 5.4% and 5.9%. Along with the stock market wherein the benchmark S&P BSE Sensex has gone up 21.4% since the beginning of the year, the optimism is now widely shared. “It is not an exaggeration to say that India is set to be Asia’s biggest turnaround story. We expect GDP (gross domestic product) growth to rise to about 6.5% in 2015 and at least 7% in 2016, marking a watershed year when India’s economy likely starts to outpace that of China. Growth in India is largely domestic driven, which offers a huge pool of opportunity for investors," noted a recent research report from Nomura Global Market Research. This optimism is backed by the idea that India now has a stable government which has promised to bring growth back on track and is widely seen to be moving in the right direction since it took office in May.

Story behind numbers

The encouraging economic data has significantly minimized the risk of macroeconomic instability, which was a big concern for the financial market in the year 2013. On the external front, for example, the Indian rupee is showing greater signs of stability and the current account deficit in the last fiscal came down to 1.7% of the GDP compared with 4.7% of the GDP in the previous year. The Index of Industrial Production (IIP), after being flat for about two years, registered a growth of 4.7% in May and is now expected to remain in the positive territory for the rest of the year. “We believe that the policy push directed at boosting the investment cycle and improving domestic sentiments should help manufacturing growth to stay in the positive zone for the rest of FY2015," said a research note from Kotak Economic Research. The Business Cycle Indicator (BCI) of ZyFin Research, a financial research and analytics company, showed a growth 6.6% in June. “The third consecutive improvement in the BCI suggests that the Indian business cycle is already on the recovery path," the firm said in its note.

Inflation, which has been one of the biggest concerns in the recent times, has also shown early signs of softening, though the deficient monsoon continues to remain a risk. Inflation based on Consumer Price Index for June came in at 7.31% compared with 8.28% in the previous month. Inflation-based on the Wholesale Price Index for June was at 5.4%. “The decline in inflation numbers is somewhat surprising, but they are broadly in line with the trajectory based on the high base year inflation in FY14. However, the food price momentum is still quite strong. While there is some softening in inflation for mineral items, there are signs of core inflation picking up," said a note from Emkay Global Financial Services Ltd. Analysts, however, do not expect The Reserve Bank of India to cut interest rates in the immediate short run.

What does this mean for the stock market?

Improving economic indicators should help boost investor sentiment in the marketplace. “There is not much reason to get enthused by the data as yet, but of course we can say that the economy has bottomed out," said Dipen Sheth, head (institutional research), HDFC Securities Ltd. Sheth expects economic conditions to improve over time. Tushar Pradhan, chief investment officer, HSBC Asset Management (India) Pvt. Ltd, argues that what we are witnessing is a cyclical recovery. So what will this cyclical economic recovery mean for the market? “Despite its strong 25% gain over the past four months, we expect the Sensex to continue to outperform Asia ex-Japan and global indexes in the quarters ahead… Over the next five years, we expect the market to provide around 15% compounded annual growth rate, driven initially by multiple expansion and then by earnings growth as economic growth picks up," said the Nomura report. Others also agree. “Around 15% compounded returns in the next 3-4 years is a no-brainer," said Sheth. He further added that in the last few years, our market was a “sell on advances" market and now it has become “buy on dips" market, which means corrections will be used by investors to accumulate stocks. But does this mean there are no economic risks to the market? “There is no period as ‘risk-free’ in the market but the probability that those risks will play out in the market is very low at this stage," said Pradhan. Market participants are counting geopolitical tension in Ukraine and Iraq as a risk. Also, change in policy stance by the US Federal Reserve if it leads to higher interest rates in the US and elsewhere is a risk. But analysts believe that if these risks affect the market, it will be only for the short term.

Mint Money take

With some improvement in macroeconomic fundamentals, the outlook is likely to remain positive, keeping aside unforeseen shocks. However, since markets have run up quite a bit since the beginning of the year, there is a chance that it remains in a narrow range for a while. Investors would do well by not trying too much during this period and stick to quality stocks as economic indicators facilitate an upward movement in the stock market.

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Published: 21 Jul 2014, 06:43 PM IST
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