With India giving a clear mandate to the Congress-led UPA, for the first time ever in the Indian stock market history, trading had to be suspended for the day after the Nifty breached the 20% circuit filter on Monday May 18.
There wasn’t a single stock in the Sensex that ended the day in the negative – more than a third of the stocks gained more than 20% and 75% of the remaining gained between 10% and 20%. The market expects the new government to unleash Reform ? Part Two, and stocks from sectors including infrastructure, banking and real estate moved up.
We will advise retail investors not to go overboard and concentrate on fundamentals. While most of the short covering would be in F&O stocks, hence large caps mainly, which would move the market up, large cap stocks are trading at the high end of valuation and euphorically valued. One needs to look into midcap stocks where there are no corporate governance issues and earnings visibility is strong. Of course, a stable government at the Centre would mean that India could move on its path to reforms with relative ease, but things will still take time to take off given our bureaucratic setup and slow decision making process. The Budget is the next big event, and the next 100 days would be crucial for the government to set up the agenda. Reforms in the insurance and pension sectors, FDI in retail, aviation and real estate, introduction of GST, auctioning of the 3G spectrum and NELP ? VIII, and disinvestments to control ballooning fiscal deficits could be a few on the agenda. However, one should keep in mind that under the current fiscal circumstances, maneuverability of the government is limited.
As a result, the rupee would gain as the investment climate in India eases and that could bring in more FII flow. However, investors would get an opportunity to invest post the budget and Q1 10 results, as we expect the market to move between 11,500 and 15,500 over the next 3 months.
