‘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

The Economic Times - - Companies -


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.

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