India's Sensex Rallies to Highest Level in More Than Two Years
Comment of the Day

May 15 2013

Commentary by David Fuller

India's Sensex Rallies to Highest Level in More Than Two Years

Here is the opening from this Bloomberg report, posted on SFGate:
May 15 (Bloomberg) -- India's benchmark stock index jumped to its highest level in more than two years on speculation the central bank may lower banks' reserve-requirement ratios after the inflation rate dropped to a more than three-year low.

The S&P BSE Sensex gained 2.5 percent to 20,212.96 in Mumbai, the highest close since Jan. 5, 2011. Mortgage lender Housing Development Finance Corp. rose to a record, the biggest contributor to the index's advance. ICICI Bank Ltd. climbed to a more than three-month high, helping drive a gauge of lenders to a 30-month high. Cigarette maker ITC Ltd., which has the largest weighting in the Sensex, rallied for a second day.

Reserve Bank of India Governor Duvvuri Subbarao said yesterday that the slowest inflation since November 2009 will be factored into monetary policy discussions next month. Subbarao cut interest rates for the third time this year May 3 and said there was little scope for further easing because of the possibility of price pressures returning.

"We're anticipating a cut in the cash reserve ratio of 50 basis points," said R.K. Gupta, who helps oversee about $864 million in assets as a managing director at New Delhi-based Taurus Asset Management Ltd. "Things are under control on the inflation front, which may prompt the RBI to reduce rates."

David Fuller's view Today's technical action for the Indian stock market has been impressive, especially following Monday's downward dynamics for the Sensex (weekly & daily) and Bombay Banks Index (weekly & daily). Significantly, these indices showed no confirming downside follow through on Tuesday, closing with small gains for the day. Today's big upward dynamics pushed the Sensex above its January high, and perhaps more importantly, Bankex to its highest level since November 2010.

This strength is welcome for those of us who have remained overall long of India since 2003, lightening occasionally on rallies and buying following setbacks, not least after the 2008 slump. India and its politics offer a rollercoaster ride which is only acceptable from an investment perspective because this unwieldy developing economy has some world-class entrepreneurial skills.

Frankly, the extent of the rally since mid-April is a welcome surprise, especially as there was plenty of discouraging news from India following the November 2010 highs. However, this galvanised Prime Minister Singh into action and the bullish technical signals off the mid-April lows were noted.

Interestingly, India has been helped by the fall in commodity prices, not least for Brent crude oil. These have reduced the country's inflation problem. Also, the general election scheduled for a year from now, assuming the current minority government is not overthrown, has encouraged the two main parties to emphasise economic growth. I also assume that the global stock market rally, not least for Japan, has helped to support India's recent stock market rally.

While India's Sensex and Bankex Indices are testing their all-time highs, there is no evidence that this market is seriously overbought, judging from the discounts to NAVs for various India trackers listed in the Fullermoney Chart Library. For instance, the JPMorgan Indian Investment Trust (JII LN) (weekly & daily), which I have held since 2003, currently has a discount to NAV of 11.62%, according to Bloomberg today, as it challenges lateral resistance near 400. However, this briefly traded at small premiums between 2008 and 2009. Here are JII's Top-10 Holdings.

With Wall Street and many other stock markets trading at short-term overbought levels, I would be surprised if India saw another significant advance over the next few months. However, the weekly Sensex and Bankex charts shown above look constructive for the medium term, provided they continue to hold above their April lows. A close beneath 19,600 for Sensex would provide the first evidence of renewed selling pressure near the historic highs.

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