Foreign Investors To Continue Buying On Negative Rates

Normal economics has been tossed aside as speculators are piling on to government debt in the European region and driving bond prices higher. That will spur more risk money and carry trade investors to seek equities in emerging markets, particularly India. As foreign investors are expected to continue their buying spree, a positive bias in the Indian markets will continue.

Stock markets are steadily rising due to the decent spell of first quarter numbers and a small but decent expansion in the broader economy. The first of the results have shown that the underlying growth story remains strong.

The giant of the tech sector, TCS surprised with good growth numbers. Infosys lowered its guidance, but underlying growth is still strong. Private sector financials continue to have a growth party. IndusInd Bank reported profit growth of 28 percent in quarter one. In the coming weeks, the street will be watching further business consolidation in private sector financials that will drive the markets.

This sector is expected to grow multiple times in the next half decade and is fast becoming a proxy of the consumption sector. Indians are increasingly consuming home and car loans, apart from consumer loans for air conditioners and washing machines in domestic and second tier markets.

Hence, an exposure to some the fast growing stocks in the NBFC sector is a good way to build your portfolio in the coming months. But keep buy on dips. Most NBFC stocks have shown a secular run up in stock prices, so wait patiently for corrections or buy very slowly into this segment.

Globally, a consolidation is taking place is the bigger foreign markets. Indian markets could see a reaction to the events happening in the global market, but there is an underlying strength in the biggest economy, the US, which is expected to see an increase in earnings of frontline companies.

The Indian economy too saw an increase in the Index of Industrial Production to 1.2 percent signaling that an expansion is underway. Also, the Indian rupee is gaining strength and has slowly inched back to near Rs 67 zone, after dipping post the Brexit news. At the beginning of the year, the Indian rupee was trading closer to levels of around Rs 64. If the economic expansion shows strength, the Indian rupee could gain further ground in the next few months. A stable currency attracts more foreign investors, and that bodes well for the equity markets.

But stocks are near its highest levels of the year covering up most of one-year losses. Now the markets are showing returns of just -1.3%. One year returns for the small-caps are at 6.2 percent, mid-caps 5.7 percent.

However, valuations are stretching at 22 times earnings. Sure the upticks in this quarter earnings can drive price to earnings ratios lower, and keep valuations to below 20 levels in a few months. A focus of buying on negative news is a prudent way to accumulate in a market that seems to have an overextended run. Hence, go easy with your buying.