The Bombay Stock Exchange signage is seen through foliage in Mumbai. Rakesh Arora, India’s best equity forecaster, is backing the rebound of the Sensex from its worst quarter in nearly four years.

Bloomberg
Mumbai

India’s best equity forecaster is backing the country’s stock market to rebound from its worst quarter in nearly four years.
Rakesh Arora, the head of research at Macquarie Capital Securities India, says the S&P BSE Sensex will rise 7% by the end of the year as increased monetary easing and falling inflation bolster the outlook for profits. That would be the biggest quarterly advance since Prime Minister Narendra Modi came to power in May 2014, and follows a 5.9% drop in the last three months. Reserve Bank of India Governor Raghuram Rajan last week took advantage of a rout in commodity prices to lower the policy rate by 50 basis points, twice as much as most economists expected.
“The biggest boost to the market has come from the surprise rate cut,” said Mumbai-based Arora, whose Sensex forecasts have been the most accurate in Bloomberg surveys over the past two years. Increased government expenditure and wider profit margins spurred by lower inflation should lead to “a pickup in earnings growth in the second half,” he said.
As a commodity importer, India has benefited from the fall in everything from oil to iron, which has pulled down the country’s inflation rate. That’s given Rajan scope to bolster support for growth, in a contrast with emerging market peers like Brazil that have had to raise rates, as well as give the government more firepower to spend on much-needed infrastructure. Analysts predict profits for the Sensex-listed companies will expand 36% over the next 12 months, after rising 1% in the third quarter.
While Arora has cut his year-end Sensex target to 28,700 now from 31,600 last month, that’s above the average estimate in a Bloomberg survey of five analysts. The survey predicts a 6.6% gain by the end of December for the 30-stock gauge, following its worst quarterly performance since 2011. The central bank lowered its main rate by 50 basis points on Sept. 29 to 6.75% after most of the 52 economists surveyed by Bloomberg predicted a quarter-point move. Consumer prices rose 3.66% in August from a year earlier, the smallest increase in nine months, latest official data show, and economic growth slipped to 7% in the April-June quarter from 7.5% in the preceding three months.
Since taking power in May 2014, Modi has allowed higher overseas investment in some industries, pledged to cut the fiscal deficit to an eight-year low and created a company to court sovereign wealth funds and other rich investors to meet his goal of spending $1tn on roads and ports over five years. The government’s planned expenditure in April to August, including that on infrastructure, was 40% of the amount budgeted for the year ending in March 2016, up from 31% a year earlier.
“India is among the few emerging markets that have the ability to pump-prime the economy through public investments, as savings from oil can be channeled into productive capital expenditure,” Abhay Laijawala, head of research at Deutsche Equities India, who was also the most accurate Sensex forecaster last year along with Arora. Laijawala now has a year- end target of 28,000 for the Sensex, down from 31,000 in July.
Increased volatility in global asset prices threatens to undermine any rally this year, said Pankaj Pandey, the head of research at ICICIdirect.com, a unit of India’s biggest private lender. Pandey has cut his Sensex earnings growth estimate for the next 12 months to 13% from 16% because of price swings in commodities.
Concern about China’s slowdown roiled world financial markets in the third quarter, with the Chicago Board Options Volatility Index - known as the VIX - jumping the most since at least 1990 in August. The Bloomberg Commodity Index has rebounded almost 6% since reaching its lowest level since 1999 that month, while crude has surged 7.1% this week alone. India imports about 80% of its crude requirements.
“Chinese growth concerns would continue to keep the market worried in the shorter term,” said Pandey.
While valuations have fallen from five-year highs recorded earlier this year, Indian stocks are still expensive relative to history and their developing nation peers: the Sensex trades at 21.2 times reported earnings, compared with the five-year average of 17.9. The MSCI Emerging Markets Index is valued at 12.3 times.
For now, overseas investors are turning more positive on Indian equities, buying a net $221mn in the first four days of this month, after withdrawing $3.46bn from the market in August and September. The Sensex has climbed 2.6% in October as global shares rebounded after traders pushed back estimates for higher US interest rates.
Indian equities are the “stand-out story” among emerging markets, and foreign investors will return in greater numbers as world markets stabilize, according to Rajiv Mehta, assistant vice president of equity research at India Infoline. “The surprise rate cut by the RBI has lifted the mood. The markets have yet to fully realize its importance.”