In contrast to fears
that India’s parliamentary elections would result in an unstable
coalition, the Congress party has claimed an overwhelming victory,
garnering 262 seats. This is likely to lift investor sentiment and
confidence on hopes that reforms which have been put on the back burner
(due to opposition by the left wing) may finally be passed through.
High Hopes
On the cards are potential reforms in the pension and insurance
sectors, liberalisation of Foreign Direct Investments and the greater
role of the private sector in infrastructure development. In addition,
we are likely to see greater traction in the government’s
privatisation
program. The revival in investment momentum may improve corporate
confidence and cause capital flows to resume. On balance, the
combination of all these factors may boost the mid term outlook for
GDP. However, concerns over India’s burgeoning fiscal deficit are
unlikely to go away in the near term, although capital inflows may
reduce the pressure on the Balance of Payments, as well as keep
interest rates low. We would like the budget, which would be presented
in the next 30-45 days, to include strategies to address the
country’s
deteriorating fiscal balance.
Sensex to Gain Further Ground
We expect the Sensex to gain further ground in the medium term on the
back of positive investor sentiment. The financials, real estate,
industrials, materials and energy sectors are likely to outperform at
the expense of the more defensive sectors (e.g. consumer staples,
utilities, telecoms and export oriented sectors). We have been positive
on Indian financials. The recent earnings results of Indian banks have
exceeded expectations on the back of treasury gains, lower than
expected Non Performing Loan provisions and improved net interest
margins.
*The above commentary was written as at 18 May
2009.