Equity markets set for substantial recovery in next two quarters

The Sensex ended at 27,324 last Friday, marginally lower than 2014 year closing level of 27,499. While the Sensex is down 9% from its life-time peak achieved in early March, many large-cap stocks are down 11% to 21% from their 2015 peaks. Suddenly, the so-called structural bull-run got a break!

Most analysts across the world have forecast around 7.5% GDP growth for India in the current fiscal which is estimated be the highest among G20 economies. However, we hear from many that "the ground reality doesn't reflect such optimism".

The major reason for such a dichotomy between the overall GDP growth and perception on the ground is due to poor growth in the industrial economy. The index of industrial production (IIP) contracted 0.1% in fiscal 2014 and limped back to positive growth of 2.8% in fiscal 2015, while the overall GDP growth is expected to be around 7% in fiscal 2015. Though the industrial sector accounts for just about 17% of total GDP, companies engaged in industrial activities account for about 55% of total market cap of Nifty companies. A similar trend is seen among all listed companies outside the Nifty as well. The country's export also posted de-growth for the fifth month in a row in April.

However, a few macroeconomic indicators provide us hope for the recovery of the industrial economy. The FDI inflows rose 39% yoy during the first 11 months of the last fiscal to $28.82 billion. In April 2015, while the revenues from freight earnings of the Railways grew at 17% yoy, the indirect tax collections grew at 46% yoy, which is one of the highest in the recent years. Interestingly, the collections from excise duty jumped 112% yoy in April – it is partly on account of duty hikes on fuels, but still reflects some improvements in the sales of industrial sector.

The IIP itself recovered from 0.1% contraction in fiscal 2014 to 2.8% growth in fiscal 2015. The industry is likely to get further boost from possible aggressive rates cuts in the next six months as the inflation rate based on WPI remains in negative zone for the sixth month in a row, also retail inflation fell to less than 5% and fiscal deficit was contained at 4% for fiscal 2015 as against the revised target of 4.1%. Over Rs 3 lakh crore to be mobilised through auctioning of coal and spectrum and budgeted 30% hike in the capex of PSUs augur well for accelerating public investments. Unless the God fails India in terms of any possible major failure this monsoon, the industrial economy and hence the equity markets are set for a substantial recovery in the next two quarters.