Monday, May 18, 2009

India Stocks, Rupee, Bonds Surge on Congress Win; Shares Halted

India’s benchmark stock index jumped a record 17 percent, bonds rose and the rupee gained the most in two decades after Prime Minister Manmohan Singh’s Congress Party won nationwide elections.

Share trading was halted for the first time ever after the Sensitive Index, or Sensex, breached a daily limit set by the market regulator. The rupee climbed 3 percent against the dollar and the benchmark bond yield fell 12 basis points, the most in almost two weeks.

“Markets are euphoric,” said Rahul Chadha, the Hong Kong- based head of Indian equities at Mirae Asset Global Investment, with $46 billion in global equities. “The focus by federal and state governments on development will lead to a structural re- rating of India.”

The ruling Congress party won the most seats since 1991, when then-finance minister Singh abandoned Soviet-style state planning and introduced free-market reforms that have helped India’s economy quadruple in size. With almost twice as many seats as the main opposition, Singh, 76, may further reduce barriers to foreign investment in insurers and retailers, plans that had been frustrated by communist lawmakers.

Bharat Heavy Electricals Ltd., whose turbines and generators light up three of every four homes in India, leaped 18 percent. The Congress victory will clear the way for the government to proceed with billions of dollars in pending orders and should also give foreign investors confidence in the country, Bharat Chairman K. Ravi Kumar said in a telephone interview.

Winning BRIC

Kamal Nath, trade minister in the outgoing administration, said in an interview the government “should aim” to boost growth to 8 percent in the business year that started April 1. The $1.2 trillion economy is expected by the central bank to expand 6 percent, compared with average growth of 8.6 percent in the previous five years.

The Sensex extended its year-to-date gain to 48 percent from 26 percent, surging to first from last among the so-called BRIC countries including Brazil, Russia and China. Among global benchmarks, only Peru’s stocks have performed better. The Indian measure now trades at 15.6 times earnings, twice the 7.7 multiple of November, data compiled by Bloomberg shows. That’s still lower than China, at 26.8 times, or Brazil.

The Bombay Stock Exchange, founded in 1875, halted trading within seconds of the market’s opening at 9:55 a.m. local time as shares surged. Trading resumed at 11:55 a.m. and stocks jumped further, breaching limits determined by the Securities and Exchange Board of India, triggering an automatic shutdown for the rest of the day for the first time ever.

Freedom of Pricing

Oil & Natural Gas Corp., the country’s biggest energy explorer, added 16 percent. “It will not be surprising if the government allows some amount of freedom on fuel pricing, including gas,” ONGC Chairman R.S. Sharma said in an interview. “These issues have been languishing with the government as there were pressures from allies.”

The Sensex surged 17 percent to 14,284.21, while the Nifty soared 18 percent to 4,323.15. The rupee jumped 3 percent to 47.92 a dollar at the 5 p.m. close in Mumbai, the biggest advance since March 1986. The yield on the most-traded 6.05 percent note due February 2019 dropped 12 basis points to 6.3 percent in Mumbai, according to the central bank’s trading system.

“The election result is extremely positive and very, very bullish,” Madhusudan Kela, head of equities at Mumbai-based Reliance Capital Asset Management, the nation’s largest money manager overseeing $18 billion of assets, said in an interview. “This will provide a government which is stable and has powers to take decisions.”

Rally Risk

Today’s euphoria is a contrast from the Congress victory five years ago. The Sensex plunged 11 percent on May 17, 2004, the most in more than a decade, on investor concern a government formed by the Congress Party and communist allies would slow the pace of reforms.

Credit Suisse Group said while India will benefit from a “large amount of capital flowing into” the country, the rally may be halted by “global markets, monetary and fiscal constraints, and data disappointment.”

Morgan Stanley raised the country’s stocks to “overweight” from “underweight,” saying never before had its model recommended overweighting India. The two-step upgrade reflected improvements in political risk, outlook for the business cycle and earnings growth, London-based emerging-market strategists Jonathan Garner and Michael Wang wrote in a report today. The brokerage boosted its forecast for economic growth next year to 5.8 percent, from 4.4 percent predicted earlier.

Surpassing Estimates

The latest victory exceeded the most optimistic prediction in exit polls released by NDTV television channel after the five-week elections ended on May 13.

The rupee will gain as much as 15 percent by the end of next year, and stocks will rally after election tallies ensured a stable government, said Reliance Capital’s Kela.

The nation’s benchmark stock index may surge as much as 20 percent over the next week as overseas investors purchase up to $3 billion of Indian shares within a month, Singapore-based Samir Arora, who oversees Helios Capital Management Pte, an India focused hedge fund, said before the market opened.

Overseas Investment

The stock market may draw overseas investments worth $10 billion this year as stimulus measures around the world increase trading, Kela said on May 16. Purchases of Indian equities by overseas investors last month exceeded sales by the most since October 2007 on waning risk aversion and on optimism India’s $85 billion stimulus plan will revive economic growth.

Today’s gains “will hold for some while, but then the question will be what does the government do,” said Nicholas Field, a London-based emerging-markets money manager who helps oversee about $12 billion at Schroders Plc. The overwhelming victory “has suddenly made people build into valuations a possible structural reform in all sorts of different sectors,” he said.

Domestic-driven industries such as banking and autos will perform well, Reliance Capital’s Kela said, without naming any companies.

ICICI Bank Ltd., India’s second-largest lender, surged by a record 23 percent to 707.10 rupees, while its American depositary receipts rallied 29 percent to $30.19 as of 9:58 a.m. in New York. Global depositary receipts for State Bank of India, the nation’s biggest, climbed 29 percent to $70.70 in London.

Tata Motors, Infosys

Tata Motors Co., India’s largest truckmaker, added 14 percent to 301.30 rupees, the most in 16 years in India. In New York, its ADRs jumped 20 percent to $9.13. Infosys Technologies Ltd., the nation’s second-biggest computer-services provider, climbed 9.8 percent to $35.15 in U.S. trading.

Reliance Industries Ltd., the country’s most valuable company, jumped 26 percent to $98.80 in London.

The Sensitive Index won’t fall to its March lows, and probably will find a new base at between 10,000 and 11,000, Kela said. The Sensex rose 2.5 percent on May 15 to 12,173.42.

“Bull markets are back, unless we see complete chaos in global markets,” Kela said. “India will outperform over the next one to three years.”

The rupee may appreciate 10 to 15 percent against the dollar over the next 12 to 18 months, Kela said. That’s more bullish than the median of 28 analysts in a Bloomberg survey for the rupee to end next year at 47 per dollar. The currency closed May 15 at 49.395 per dollar.

Asia’s third-biggest economy expanded 5.3 percent in the quarter through Dec. 31, the slowest pace since 2003, while factory output in March shrank the most in 16 years.

India will outperform other emerging markets as long as the government adopts a pro-growth, pro-reform stance, Chadha said.

“We needed a stable government especially in the context of the global environment, which is still challenging,” Chadha said. “We need the government to kick-start the economy.”