Modi's operandi: Expect current rally in markets to linger

May 27 2014, 09:16 IST
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SummaryAs mkts continue to bet high on Modi govt's business-friendly policies, expect current rally to linger.

With the general election throwing up a majority government after three decades, expectations are naturally very high from the BJP-led NDA. This positive mood is reflected in the run-up on the stock and currency markets, on the back of strong foreign inflows, amid hopes of a strong, stable and business-friendly government at the Centre.

Analysts say investors would wait for the Budget to have a clearer understanding of the policies to be pursued by the new dispensation. If the new government does take necessary steps to ensure fiscal discipline, there could be a prolonged period of strong economic as well as stock-market performance. They suggest that investors especially retail stay put in the near term as there could be a significant market appreciation over the next few years.

However, they also caution that given the volatility in the market, there could be bouts of ups and downs and investors should buy at every correction in the market. The Sensex is trading at 14.6x one-year forward earnings, up from 13.7x at the beginning of the year and 12.8x in September 2013, which was when the rally in capital goods and banking stocks began. In contrast, the average multiple in 2010 was 15.9x. The five-year average multiple is 14.8x and three-year average multiple 14.2x.

Equity strategists at brokerage firm Nomura say that with a new government in, there would be a marked improvement in the execution ability, which would make enable speedier decision-making. We expect markets to be underpinned by an inherent positive bias and to give an initial benefit of doubt to the Modi-led government. This calls for a mild multiple expansion of the market on the back of a likely fiscally prudent government, which will bring down the cost of capital in the economy, on the one hand, and higher growth expectations, on the other, it says. The brokerage has raised its December-end target for Sensex to 27,200 from 24,700 a 10% rise from the current level.

Expectations of a market-friendly outcome have seen rallies in equity, rupee and rupee swaps, but the key question is whether these moves can extend.

Equities still have the most scope for further upside, with the next leg higher driven by domestic capex-sensitive sectors, says a note from Goldman Sachs. It also stresses that economic reforms and a better growth outcome will have to be delivered. The market trajectory from here even when

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