One of the bright spots in the first half of the year has been the Indian ETFs, which surged last month when the Indian National Congress (INC) party won enough votes to form a government in Delhi without allies for the first time since the 1960s. Election of a party generally viewed as pro-business, as well as the prospect of rule without coalition dynamics, sent India’s markets skyward, with most major indices posting one-day gains near 25% following the announcement of results. While many pundits speculated that Indian ETFs were overbought following the fierce rally, these funds have continued to rise in the weeks following the election, causing investors to wonder just how high they can go.
Banking on Reform
The Bombay Stock Exchange’s 30-stock Sensitive Index (Sensex) closed Thursday above the key 15,000 mark, a level last seen in early September. So what’s been spurring gains since the election results? A lot of hope and promises. Pratibha Patil, leader of the INC, recently announced that minority stakes in state-run firms would be sold in an attempt to fund spending on infrastructure and other projects. ICICI Bank recently announced that it would cut lending rates by 50 basis points, a move that many hope will boost loan growth and lower future default risk.
Record Foreign Fund Inflows
Foreign funds have been responsible for a large part of the rally, injecting approximately $6 billion into the Indian market since March, after pulling out about $13 billion during 2008. While equity markets around the globe have managed strong recoveries in recent months as well, these rallies pale in comparison to the current Indian bull market. The extent of future foreign inflows is uncertain: if developed equity markets continue to show signs of recovery, foreign investment may slow. On the other hand, if the highly-anticipated “return to growth in the second half of 2009″ doesn’t materialize, U.S. investors may look overseas for alternatives.
Next Up: Budget Announcements
The new government will announce its budget in early July, a move that will no doubt be closely scrutinized by Indian investors. The consensus expectation is that Indian markets will generally track other global markets until then. The risk at the budget announcement appears to be on the downside. The INC has already announced numerous pro-business reforms (and investors have already anticipated countless others), indicating that any policy surprises will likely be negative.
Due For a Correction?
Fears of an overextended bull market appear to be gathering steam, with many institutional investors and advisors expressing doubt over the ability of the new government to live up to the hype. Fearing that the market has rallied on optimism that fundamentals will not support, an increasing number of investors are bracing for a correction. According to K.K. Mital, head of portfolio management services at Globe Capital, “Some signs of new policy measures to lift growth are there, but meeting the expectations of the market would be difficult for the government.”
On the other hand, skeptics were out in full force following the one-day gains in the wake of the election results. Claiming that the rally was based on overly-optimistic hopes of reform, many analysts anticipated a correction at that point. Several Indian ETFs have gained between 7% and 10% since then, however, as these bears watched from the sidelines.