Time to take profits as risk appetite sends stocks to record highs

nvestors should be looking to take some profits off the table after surging foreign appetite for risk assets drove Indian shares to record highs, putting them among the most expensive in the region. Better-than-expected quarterly results from companies such as energy conglomerate Reliance Industries Ltd have underpinned the rally, but the red-hot market needs a breather.

Deep-pocketed foreign funds have bought domestic stocks and bonds worth more than $16 billion (Dh58.7 billion) this year, lured by the fastest economic growth for any major world economy.

Signs indicate that the slowdown caused by an abrupt currency shakedown — when the government last November scrapped high-value bank notes that comprised 86 per cent of the currency in circulation — are well behind us.

New Delhi’s single-minded focus to build infrastructure through massive investment in roads, highways, metro-rail systems, airports, ports and renewable energy is setting the stage for faster economic expansion in the coming years.

Big money is also pouring into housing and the government is opening up defence-related industries to private and foreign companies on condition they build manufacturing bases in India.

Hard-nosed fund managers see India’s potential gaining a notch from the stellar victory for Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) in provincial and municipal elections in many states.

The wins suggest growing support for the economic policies that Modi pushes, and is seen as an indication that he would get a second term in office come 2019.

“Global investors are riding a twin wave of satisfaction,” said equity strategist V. Venugopal. “The economy is on an upswing and political risk is falling. It provides a strong whiff of fresh air in an uncertain world.”

According to the International Monetary Fund forecasts, India’s economy, expanding at 9.9 per cent annually in nominal terms, should surpass Germany by 2022 — and eject former colonial ruler Britain from the top-five rankings.

Caution beckons

While the outlook for stocks in India is upbeat, there is always concern when the markets overheat. Rising in all four months this year, many stocks are at multi-year highs and the priciest in Asia. So, there is a strong case for profit-taking, before the rally builds new steam.

“Everybody seems to be very optimistic about India,” Suyi Kim, who oversees investment in Asia for Canada Pension Plan Investment Board, told Bloomberg News.

“I’m very bullish on India in the longer term. It’s going to move in the right direction. But there will be ups and downs.”

The top-30 Sensex climbed to record highs on two consecutive days, hitting a peak of 30,184.22 on Thursday. Profittaking pulled the widely followed benchmark to close on Friday at 29,918.40, still up 1.9 per cent on the week. The index has notched gains in all four months this year and is up 12.4 per cent.

The 50-share Nifty, which is also closely tracked by fund managers, gained 2 per cent to 9,304.05 at close, after touching 9,367.15.

“You don’t want to buy at a price that is not the proper intrinsic value,” Kim said.

“I always tell our team don’t get too excited when there’s an euphoria. When people get too excited, that’s the time you make mistakes.”

Falling interest rates are pushing more domestic savings into mutual funds, but they are holding tight wary of high prices. Data showed that cash holdings were substantial for domestic funds in the March quarter, waiting for a shakeout that would provide an opportunity to get in.

In other words, when the market retreats keep an eye open for bargains and grab the chance with both hands.

Studying the trend since the time of former prime minister Narasimha Rao, who heralded the dismantling of controls and opened up the economy in the early 1990s, analysts at Deutsche Bank give a good clue where investors should put their money in.

“In the equity market, domestic economy sectors — particularly industrials/ capital goods sectors — have seen a lot of action in the ‘final two years’ of every national government since the Narasimha Rao administration in 1991. This throws up some very distinct trends, consistently,” Deutsche Bank said in a research note.

Direction of economy

The Modi government completes three years in office next month, and the final two years of the five-year term could be quite eventful for the economy.

Production of capital goods — a barometer of the economy’s direction — tends to pick up sharply in the final two years of a government, and capex-linked sectors and consumer cyclicals show a tendency to outperform, the analysts said.

“Given the consistency, it is highly probable that we will see the same trends play out over the next two years,” they wrote.

Among the large cap companies, the brokerage likes are Reliance Industries, Larsen & Toubro, Mahindra & Mahindra, BHEL Ltd,

Hindustan Unilever, NTPC, BPCL, Tata Motors and Vedanta.

It also favours Jubilant Foodworks, Petronet LNG, Ramco Cements, Shriram Transport and UPL among mid-cap stocks.

“India has many challenges but it is also one of the very few places where not a great deal of effort can yield substantial returns,” Viktor Shvets, a top executive at Macquarie Securities, told ET Now television channel.

“Very few countries in the world these days are in that position.”