India bull market burns out after sizzling 2014

In March, the Indian state of Maharashtra banned the sale of beef, shocking carnivores across Mumbai, the country's financial capital. Although a coincidence, at roughly the same time another meaty phenomenon also vanished: India's equity bull market.

Indian investors enjoyed a bumper 2014. The benchmark Sensex index surged 30 per cent, on excitement over last May's election of prime minister Narendra Modi, and his reform heavy platform. Plunging oil prices helped, curbing inflation.

This year to date could hardly be more different. The market has ebbed and flowed but this week it stands almost exactly where it did in January. On Monday, the Sensex closed up 1.5 per cent at 27,507 but was still 8 per cent below the record 30,000 level it approached at the start of this year.

The rupee is also looking decidedly less perky, falling against the dollar. Last week it fell below Rs64, its lowest level since September 2013, and not far off the record low of Rs68 it hit during that same period of capital flight from emerging markets.

India's weakening fortunes have many causes. Domestically, analysts say some of the sheen is coming off Mr Modi's reforming image. The prime minister stands on the cusp of his first anniversary, but has yet to prove that he can live up to the lofty expectations he helped to foster.

A bitter recent battle between India's revenue department and international investors has further deflated the bullish feeling. Last month, India sprang a surprise demand for $6.4bn in tax from global fund managers, prompting Aberdeen Asset Management and other major investors to launch legal challenges.

Beyond the bad blood, this spat has helped to drive foreign equity inflows to their lowest point since August 2013, according to Credit Suisse. "People are selling India," says the head of one large Hong Kong-based investment fund, speaking on condition of anonymity. "In the end, capital is like a dog. It goes to where it is best treated."

Worse, underlying earnings performance has been dismal. The financial year ending in March 2015 is poised to produce India's weakest earnings performance in a decade, according to brokerage India Infoline. Average post-tax profits in the fourth quarter - the results of which are still being reported - are projected to rise barely 1 per cent.

And as if India's beleaguered bulls did not have enough on their plate, international factors have been problematic as well. The oil price rebound - from $47 in January to roughly $65 per barrel on Monday - hits India's heavily energy import dependent economy, reducing scope for further interest rate cuts.

But ultimately, India's recent dip is also a consequence of its exceptional run beforehand. That prompted lots of funds to take heavily overweight positions. Indeed, many still have them. As Citi's equity team wrote this week: "No market in EM has ever been liked as much as India is now."

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So are India's bulls exhausted, or simply resting? Most analysts remain positive. "Compared to other economies in the region, India's prospects still look very strong," says Bejoy Das Gupta, chief Asia economist at the Institute of International Finance. "Growth is going up, Modi's reforms are trickling in. Even now inflation is still moderate, so there is room for monetary easing."

Optimists point in particular to big forthcoming measures from Mr Modi, including a new Indian tax system and a shake-up of rules on land-acquisition, both of which could pass parliament later this week. Others hope his government will swiftly end the tax row with investors, clearing the air.

True, some year-end market targets are indeed being cut back. Even so, they make for heady reading for true India believers. Amid the recent gloom Ambit, the Mumbai-based brokerage, cut its Sensex projection for March 2016 to a mere 34,000 points, down from 36,000. That still offers a potential 24 per cent upside.

"Fundamentally, things are getting better in India, and the markets will keep responding bullishly to that," says Mr Das Gupta. "You have an energetic leader that is actually delivering things that the markets will like, even if we all wish he'd do it even more quickly."

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