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Moody’s Thumbs-up to Modi Perks up India

After almost 16 months the rating agency Moody has warned of downgrade of sorts has now raised its outlook on India from stable to positive which will only help in pushing up the growth further.  As compared to its peers India has grown at a much faster pace because of the thick crust of icing of the favorable demographics, economic diversity, helped by the better investment rates, industrialization and higher savings which will keep the expansion of the Indian economy on the track.

Moreover a support from relatively benign commodity prices and better liquidity conditions globally is just advantage India over its peers. The bank stocks are expected to rise and so also strengthening of the rupee is in the writing. The three big rating agencies- standard and poor’s, Moody’s and Fitch have rated India at the lowermost grade of investment with just a step shade up the junk status. But this upgrade in the outlook is significant at Baa3 rating in the next coming 12 to 18 months the revision of the rating for India will be done again because the rating of India is moving up at a brisk pace.

At the moment the Indian market valuations appear to be a bit elevated as they are trading at a slightly above levels of long term averages. So watch out of the industrial stocks, consumer discretionary companies and the private sector banks. As such the strong rally in the Indian equity markets in the year of 2014 which was helped by  the P/E expansion and the re-rating also favored the valuations, whereas the headroom for the P/E multiple expansion is obviously limited and so the incremental returns are likely to be led by the corporate earnings growth. With the valuation gap between the large caps, mid caps and the small caps closings their returns are also obviously to converge.

The response in the first half of the year could be a little tempered until the cues of the corporate earnings surface to trigger the economy growth and as such India is very comfortably seated to barge ahead of its peers and a huge sizable amount of the return is expected by the next five years and more.

With the expected recovery of the economic and the earnings growth, stable rupee and even the macro fundamentals are in a better position the Indian market is very favorably placed for the long term so much so that India is expected to siphon the foreign portfolio inflows averting any foreign effects and it can rightly reiterated that India is now immune to the external effects.

As the economy picks up the earnings growth will also pick up and even the GDP is also expected to improve going forward led by the expansion in the corporate earnings this only goes on to suggest that the earnings downgrade cycle appears to have stabilized and now the growth is expected to accelerate and as the cyclical recovery gains pace margin expansion could resume and even then industrial consolidation will definitely help the growth and the margins because as such the corporate earnings in India dropped from the peak of 7% in 2008 to the all time decade low of 4.5% of GDP in 2015 and the point to reiterate here is that the earnings growth will revert back to its long term  average of 15% within this decade.

The sectors to look out are the financial sector even the private sector banks are growing on the market shares and growing faster as compared to their state owned counterparts because the private sector banks have maintained a higher levels of profitability and have a very healthy balance sheets. Besides the individual sectors the bottom up stock selection is definitely going to be the key for generating the alpha going forward.

Another sector to be watched is the Indian pharmaceuticals whose valuations of the stocks are closer to their highs which is a pointy of some concern, whereas some of the stocks are growing up and delivering good growth. But there are minor hiccups like the currency fluctuations and of course the formalities of the USFDA regulatory. During these times even the investors do not mind in overpaying for the stability of the earnings as well as the predictability of the growth. The stocks to watch out for are GMR INFRA, COROMANDEL INTERNATIONAL, Mangalam Cement, Aban Offshore, APOLLO TYRES, ICICI BANK, ESCORTS, INDIA CEMENTS, JET AIRWAYS and Jain Irrigation.

With the economy on the rebound and the inflammation as well as the current account deficit is low and the economy clocking 7.4% last year and we are in the middle of the turnaround with most of the indicators are showing signs of the improvement in the India’s relatively feeble business environment and so also improvements in the low standards of governance and other infrastructure bottlenecks. So the big change is just around the corner.