India goes from fragile to fabulous

Why Indian shares are still a compelling buy

Watching the meteoric rise of India's stock markets so far this year, one can be forgiven for forgetting that just a year ago, the asset class was a poster child of the emerging market bashing.

Both benchmark indices, the Sensex and the Nifty, swooned last year on fears a tapering of asset purchases by the Federal Reserve will trigger an outflow of funds from the market, falling to year-lows in September.

But this week, India's stock markets came back from Independence Day celebrations roaring to new life-time highs, as local and foreign investors continued to pile in their money, on hopes the economy will stage a sustainable turnaround.

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The Sensex and Nifty have soared some 25 percent so far this year, and analysts are calling for more gains to come.

Saurabh Mukherjea, CEO of institutional equities at Ambit Capital, expects stocks to run up another 15-20 percent by the end of India's fiscal year in March next year.

"That has been our call since May this year, and we standing by that view. India's economy is turning, it's coming out of a downturn, fiscal and monetary policies are on the right path, and that's generating confidence in the markets," he said.

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Sahil Kapoor, chief technical analyst at Edelweiss expects the Nifty to make a dash towards 8,000 points in the near term; it closed Tuesday at a record high of 7897.50.

"Once that takes hold I see the Nifty rising towards 8,400 points by the end of this year. Generally whenever the index rises by more than 20 per cent in a calendar year we see the index rising for about 8 to 9 months on an average," Kapoor said.

India stocks started the year well, but the buying momentum really picked up in May when business-friendly Prime Minister Narendra Modi won the national elections by a landslide, on hopes the new government can stem a growth slowdown that's plagued the economy in recent years.

The Bombay Stock Exchange (BSE) in Mumbai, India
Dhiraj Singh | Bloomberg | Getty Images

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The euphoria in markets has prompted local media report to declare that India – which was tagged as one of the 'fragile five' economies last year together with Brazil, Indonesia, South Afrda and Turkey – is now part of the 'fabulous five.'

But analysts caution the rally won't be smooth-going. "Don't expect a one-way traffic," said said Ambit's Mukherjea. "There will be speed-bumps along the way."

He warns that inflation remains a big risk. India's consumer price index is hovering around 7 to 8 percent, and if the number stays at these elevated levels, it may compel India's central bank to raise rates and put pressure on growth, he said.

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Viral Bhuta, Portfolio Manager (Fixed Income) at UTI International agrees. There is definite upside on the Indian market, he said, but the risks haven't completely gone away.

"Plus, with the strong run-up, market is looking a bit toppish right now," Bhuta said, noting that India's volatility index has fallen to about 13 to 14 points from 35 to 40 before the elections, meaning that volatility is now at a 7 to 8 year low.

"That's a sign that complacency is setting in, so there is a risk of a reversal in the markets," he added.

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Still, analysts say investors who are in for the long haul should not be overly concerned with short-term correction or sell-off. "It's difficult to time the market, but with improving fundamentals, there are good reasons for investors to stay invested," said Bhuta.

So should India be retagged as a 'fabulous five?' "It's still too early for India to take on that term, we will have to see what happens in the next year or two," UTI's Bhuta said. "Perhaps a better term for India would be the 'fighting five,' because there are still plenty of hurdles to overcome."

Mukherjea of Ambit Capital says calling India fragile is a misnomer in the first place.

"India is a country that boasts of multi-year growth story, supported by robust internal demand. Sure there were some rough years, but as we have seen, those who thought India was fragile two years ago has missed out on a great investment story," he said.