Getting high

A month is a long time in the market, a couple of months even longer. As August was nearing its end, it felt like investors only had FMCG and pharmaceutical stocks to hide behind. The Sensex hit an intra-day low of 17,500 and the rupee cratered to just over 69. Now all that seems like a bad dream as investors seem to be itching to release balloons with the ‘25,000’ mark painted on. Well, that is what the Sensex is slowly but surely expected to trade at soon. The fear factor that prevailed in August was driven by talk of the Federal Reserve draining away a fraction of its generous liquidity. That ‘fear’ being done away with, it is time to celebrate. 

‘Fundamentals be damned, give us liquidity any day’, seems to be the rallying cry in the markets. According to Ambareesh Baliga, managing partner, global wealth management, Edelweiss, there is a stark contrast between market sentiment and ground realities. “The rally has been driven by global liquidity, the expectation that the RBI governor will turn things around and also better than expected second quarter earnings. But we are not quite there yet when it comes to India’s macro
scenario,” he says.  

As liquidity is expected to be plenty, the expectation is that there will be enough capital flows to finance the current account deficit in FY14. On the back of this optimism, the deficit is expected to be around $70 billion or even lower. However, Parag Parikh, founder of PPFAS AMC, believes that, “while the CAD may have improved due to the government clampdown on gold imports, reducing customs collections may adversely affect the fiscal deficit target.” He also feels it is incorrect to ascribe the rally to good corporate earnings as, “in the short run, the correlation between stock prices and corporate earnings is tenuous at best.”

That said, let’s take a look at the sectors driving the current rally. This run has been powered largely by IT, FMCG, and pharma. Why so? FMCG is a defensive play and the others have been beneficiaries of currency depreciation. This is in stark contrast to the sectors (capital goods, banking, commodities and power) that drove the bull run in 2008, when the Sensex posted its last closing high. In fact, the frontrunners back then are laggards today (see: Change of guard). Why so? Baliga says these sectors gained the most from the heady growth in 2008 and so have been impacted by the downturn the most. The banking sector has been dragged down by high NPAs and metals have been impacted by the slowdown, leading to reduced demand.

The moot question, then, is will this narrow rally transform into a broad-based one? Analysts are banking on external drivers as the domestic inflation overhang continues. “If growth in the US and Europe picks up, it should lend some steam to the rally. While a recovery is happening, Europe is currently growing at only 0.25%. This is not good enough,” points out Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance, who has a target of 20,800 for the Sensex for end-FY14. Baliga, who has a target of 6,500 on the higher side and 5,900 on the lower side for the Nifty for end- FY14, believes that a strong government at the helm of affairs after the upcoming general elections could smoothen things out. That better be the case, as the current rally seems to be counting it in.