MOST
FIIs SEE STABLE NEW GOVT PRIMING MARKET FOR A FRESH RALLY
The
stock market has been on a bull run in the hope of a stable government emerging
post elections and led by Narendra Modi. Mid-way through the poll process, the
question is will the surge sustain. Foreign institutional investors, which have
spearheaded the rally pumping in close to $5 billion so far this calendar year,
are generally optimistic though some advice caution.
UBS
analysts Gautam Chhaochharia and Sanjena Dadawala feel that a positive election
outcome “may not yet” be priced in. According to them, Nifty at 6,900 would be
a possibility if the market starts believing in a positive election outcome —
that is, the formation of a Modi-led BJP Government.
For
Macquarie, there is more upside potential in the NSE Nifty, which is already up
13 per cent since the beginning of February. It sees the market going up a
further 7-20 per cent depending on the strength of the new coalition
Government. The market has underperformed so consistently in the last five
years that despite the big run-up, it is trading at a 5 per cent discount to
the 17-year average price-earning (PE) ratio of 14.5. In 2009, the election of
a ‘strong’ government saw the market multiple (PE) jump to 17, Macquarie
observed.
Echoing
this, Bank of America-Merrill Lynch said, “Though the market is likely
discounting a stable government, we expect the market to rally by another 5-10
per cent from current levels by the year-end depending on how stable the
government actually is.” Improving macroeconomic indicators (falling current
account deficit and inflation, and analyst upgrades) will also support the
market, the bank stated.
According
to Jyotivardhan Jaipuria, analyst with BofA-ML, “The initial rally in the
market will be led by a re-rating. GDP growth should follow with the investment
cycle recovery taking 18-24 months.”
Taking
a contrarian view, Morgan Stanley, in a research report, states that the equity
market is pricing in a decisive election outcome and the beginning of a new
growth cycle in its aftermath. Morgan Stanley, which remains equal weight on
India, added: “We think the incoming government will have to de-anchor
inflation, raise capital productivity, improve the investment climate and
de-lever private balance sheets to engineer a new growth cycle.”
With
similar views, StanChart, in a report, said the market is likely to react
positively if a stable government is elected, but it might already be partly
pricing in a positive outcome based on opinion polls.
Cautious stance
There
are other cautious voices too. Says HSBC, “While the outcome of the general
elections may be important for growth, we think it is less so for India’s
sovereign credit profile. The stance of the RBI is the key factor. In the
absence of economic reforms, we think India’s long-term growth rate will be
constrained. So as long as the central bank accepts this and continues to keep
an eye on inflation, India’s credit profile will, in our view, remain stable.”
But
JP Morgan warned that the market runs the risk of getting ahead of itself and
falling a victim of its own ever-growing expectations.