‘Modinomics’ Could be a Shot in the Arm for Stock Market
Global investors draw a parallel between India and Japan in anticipation of reforms, expect another round of re-rating as elections have thrown up a stable government
ASHUTOSH R SHYAM
If Modinomics could match Abenomics, then a rally could be on the cards for the Indian stock market. Some foreign institutional investors have drawn a parallel between India and Japan, where the market zoomed 80% within six months in anticipation of the “three arrow” reform process initiated by Shinzo Abe after he took over the reins as the premier. Most global investors believe that India can see another round of re-rating as the elections have thrown up a stable government and this could push the market’s P/E valuation to 17 times from 15 times at present. There is enough room to expand the valuation multiple, given that the valuation moved up to 17 times after formation of the stable government in 2009. CLSA’s Chris Wood told clients after the Narendra Modi-led BJP swept the polls on Friday: “Modi’s win is a truly historic moment and we are now adding 2% overweight on India stance.” CLSA now has the target of 27,988 for the Sensex for March 2015. The optimism among investors is driven by expectations that the incoming government will usher in reforms that will fuel growth in the economy. “The Japanese market came out of its slumber after their premier took path-breaking initiatives to push the economy into the higher orbit. We are expecting a similar vision and initiatives from the PM-designate Narendra Modi to kick-start the Indian economy and bring it out of years of policy paralysis,” said the fund manager of an offshore fund on condition of anonymity. Even after appreciating 17% since the beginning of the year, the Indian market is trading at a P/E of 15 times on a oneyear forward basis. In 2009, the market traded 17-18 times on a one-year forward earnings basis after a stable government was formed at the Centre and most bro- kerage firms expect the market to appreciate to this range in the days ahead. UBS, in a note to its clients, said it had set its fair value for Nifty at 6,900, based on P/E valuation of 15 times and an expected earnings growth of 15% in 2014-15, and Nifty touching 7,800 on the basis of +1 standard deviation over five-year average and 15% earnings growth for the current fiscal. Investors would be willing to give a premium for hope of growth and also look beyond 2014-15 earnings estimate, said the note, which was reviewed by ET. The note added that by the end of 2014, investors would start looking at 2015-16 estimates. Based on its expectation of 15% earnings growth in 2015-16, and 15 times P/E, UBS set its target for Nifty at 8,000 for 2014-end. In its post-elections note to clients, multinational brokerage house Macquarie raised its target for Nifty to 8,400 from 7,200.