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Rediff.com  » Business » Pre-election rally: Will the markets bring more cheer?
This article was first published 9 years ago

Pre-election rally: Will the markets bring more cheer?

April 10, 2014 08:52 IST

Image: Markets have hit all-time highs.
Photographs: Reuters Sachin P Mampatta in Mumbai

While some argue there is more upside left, others suggest valuations might have run up far ahead of fundamentals.

Large foreign and domestic brokers have differing views on the latest run in the markets that has taken key benchmark indices to all-time highs.

While some argue there is more upside left, others suggest valuations might have run up far ahead of fundamentals.

A UBS Securities India Strategy report says the markets are not pricing in a positive election outcome yet. “In our view, a more euphoric sentiment among investors could imply higher multiples. The current valuations for Nifty... imply that a positive election outcome may not yet be priced in,” says an April 7 report authored by analysts Gautam Chhaochharia and Sanjena Dadawala.

Pre-election rally: Will the markets bring more cheer?


Photographs: Uttam Ghosh/Rediff.com

A Kotak Institutional Equities Strategy report by Sanjeev Prasad, Akhilesh Tilotia and Sunita Baldawa says the upside might be limited. 

“We see limited upside in most large-cap stocks with stock prices largely discounting estimated earnings for 2014-15, even 2015-16 in some cases. The risk-reward balance is quite unfavourable in general, based on the binary outcome of national elections alone... We hope the election outcome is in line with the market’s hopes,” said the report, dated April 8. 

The BSE Sensex, an index whose movements are seen as representative of how the market is doing, on Wednesday rose 358.89 points, or 1.61 per cent, over previous close to end the day at 22,702.34 - an all-time closing high.

This was after touching an intra-day high of 22,740.04. The National Stock Exchange’s Nifty closed at 6,796.2. 

Pre-election rally: Will the markets bring more cheer?


Photographs: Uttam Ghosh/Rediff.com

While some say most of the gains are already priced in, others suggest markets could rise further if the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA), considered more market-friendly, comes to power. 

“Though beaten-down sectors have rallied in the past couple of months, most other sectors are still trading at significantly low valuations at the bottom of their earnings cycle… We believe a likely NDA government under BJP could provide a fillip to the economic growth and corporate profit trajectory. This could aid further re-rating of the markets,” says Motilal Oswal Securities’ India Strategy report for April. 

“In the past, India’s equity markets have reacted strongly to unexpected election outcomes... Markets are likely to react positively if a stable government is elected, but might already be partly pricing in a positive outcome based on the opinion polls,” says an April 8 Standard Chartered Bank report, ‘India – Hope builds, but delivery will be key’, by Anubhuti Sahay and Samiran Chakraborty. 

Pre-election rally: Will the markets bring more cheer?


Photographs: Uttam Ghosh/Rediff.com

The Sensex has surged 7.23 per cent since the beginning of this year. A large part of the gains has been driven by foreign institutional investors (FIIs), which have pumped in over Rs 27,000 crore (Rs 270 billion) since January. They have been driven mainly by sentiment, say market watchers. 

Only a concrete outline of the new government’s plans for the economy might be able to tell if the current rally is overplayed, says U R Bhat, managing director, Dalton Capital Advisors (India), a registered FII.

“From the fundamentals point of view, the market seems to have run up as much as it could... But, the market does not always run only on fundamentals, though it reverts to the same over time. Sentiment is positive and could take markets higher till the new government presents its measures in its Budget. That will probably act as a reality check,” he adds. 

Pre-election rally: Will the markets bring more cheer?


Photographs: Uttam Ghosh/Rediff.com

Ramesh Damani, a BSE member, says the current rally might only be the beginning.

“I think we are in the early stage of a bull market. It is unlikely we will violate 20,000 on the downside,” he says.

“We would expect markets to correct five per cent by May 16, the day of counting of votes, as investors cut some positions to hedge against an unexpected election result… We continue to be positive on the markets and expect markets to be 10 per cent higher than the current level by the end of the year,” says Bank of America Merrill Lynch’s India Equity Strategy report by analysts Jyotivardhan Jaipuria and Anand Kumar.

 

 

 

 

Source: source