After 6 long years, the Sensex recorded a new high during the month. The Sensex had peaked at 21206 in Jan 2008 and had been trading below that level since then. In Dec 2013, it finally managed to hit a peak of 21483, and currently trades near its peak level. During the same period India’s GDP in Rupee terms has grown from Rs 4.5 lac cr in 2008 to nearly Rs 9.4 lac cr in 2013, a growth rate of 15.6% pa in Rupee terms. Growth in real GDP has been slower at close to 6.5%.
Over the last several months, most market commentators could talk about little else than the much anticipated QE taper. This refers to the unwinding of the quantitative easing program started by the US Federal Reserve in response to the 2008 crisis to stimulate the economy. In Dec 2013, the Fed finally announced that it would reduce the amount of securities it will purchase by $10 bn to $75 bn a month. Please note that the Fed will continue to buy securities (provide monetary stimulus), but at a slower rate. A large number of market commentators had a cautious stance on equities because of the fear of what would happen, once the Fed decided to taper its QE program. But surprise, surprise, almost all global markets went up after the announcement. We have observed over time, that whenever an event is highly anticipated, the market reaction on the actual occurrence of the event does not correspond to expectations. One of the positives of the Fed announcement is that the event is now behind us and one can get on with our lives.
The Indian stock market has been consolidating near its previous high levels. We have mentioned in the past that the valuations of the market and the technical picture as well point to the end of the bear market in the near future. Over the last few months, one has seen some revival in market sentiment, even though the economic outlook continues to be weak. We do expect the next 6 years to be much better than the last 6 years for Indian equities.
One key contributor to the positive sentiment has been the way the RBI has handled the current account deficit situation. As the RBI governor said in his interview, after the recent monetary policy review, India has demonstrated that it can raise money when required. The large Indian diaspora is more than willing to put money into the country, if it is provided with an attractive return. This was amply demonstrated by the roughly $35 bn that was collected through the FCNR (B) and bank borrowing routes recently.
Another fear dogging the market over the last several months has been the upcoming Lok Sabha election and the possibility of a hung verdict in light of the anti-incumbency that the current coalition faces. One of the key findings of the recent state assembly elections results has been the rout of the small regional parties, who saw their vote share and seat count shrink dramatically. This augurs well for the possibility of a stable government at the Centre in the 2014 Elections. Post the election results, there was fear among market participants that the incumbent government would resort to populist measures to try and secure votes in the Lok Sabha election. On the contrary, what one has seen is the government toeing the line of reform and a number of reform minded steps have been taken recently.
While we are mindful of the fact that there are problems in several pockets of the economy in terms of high indebtedness and the non-performing assets of banks, there continue to be large sections of the corporate sector that have behaved responsibly and grown their free cash flows in a steady manner. These remain our companies of choice for the future.