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Even before exit-poll numbers are announced, let alone the final election results, BSE Sensex shot up by 650 points to enter into unchartered territory. It was normal to hear market chatter while travelling by mumbai locals on a day the market touched a new high. Queries doing the rounds are - Has the party already begun? Can the Sensex cross 25,000 on the day of the results? Is it too late to enter the market now?
If one thought that only gullible retail investors generally turn euphoric around such events, think again. Credit Suisse conducted a survey of 118 fund managers who are betting on India from across the globe on Indian market strategy. More than 70 per cent of the fund managers believe that the Narendra Modi led government would drive an earnings turnaround within a year. While the retail investors travelling by train in Mumbai have a perception that things will improve once a new government comes in, most of the expert fund managers believe that it is fundamentally possible to change the economy in a year’s time.
Their portfolio bets also reflects this optimism, according to the survey. Only 16 per cent of the managers expect defensives to outperform over the next 12 months. Hence, only 20 per cent of the stocks they hold belong to this category. It is a clear ‘risk-on’ bet that these fund managers are taking.
While the fund managers surveyed are bullish on the election outcome and the economy, Credit Suisse, who conducted the survey does not hold the same view. Credit Suisse says that hopes of a 12-month turnaround in the investment cycle may get dashed. They do not think that even a strong new government at the centre can revive the investment cycle in less than two years. However, the momentum in the market and a strong and clear verdict can push up prices for a few more months; possibly till August, says the global broking house.
That there may be more steam in the rally can also be seen from the fact that we are nowhere close to the higher end of the valuation band, let alone bubble valuations. At the current level, the index is priced at 15 times it FY15 earnings which is the average valuation of the last five years. A UBS report says that euphoric level of valuations will be when Nifty touches a level of 7,800. Nifty closed at its all time high level of 6858.80 on Friday.
But is it still enough?
The recent sharp rise in the market and the increasing euphoria and participation of retail investors, which is exhibited by a faster growth rate of mid-cap and small cap indices is reason enough to raise the red flag. There are too many headwinds that will prevent a sharp recovery in the economy.
A new government will take time to settle down and announce a series of measures to prop up the economy. Looking back at the tenure of UPA II, it is the implementation of these measures that counts and only then will the results flow. In a recent interview, an Infrastructure Finance company head said that for a project to reach from concept stage to implementation stage is a two year cycle.
Moreover, one can expect some governance hurdles in the initial days as movement of bureaucrats will affect speed of reforms. To add to the governance hurdle will be the fury of God. El Nino is expected to affect the pace of monsoon this year. This would fuel food inflation and thus prevent the RBI to reduce interest rates which is essential to push growth.
Global concerns
The global economic and political scenario is deteriorating by the day. Ukraine-Russia trouble can spill over to the financial markets. Recent economic numbers from the US have not been encouraging.
To make matters worse, a lot of money is floating around in the world market. Junk Bonds are once again in vogue. Greece after defaulting on its loans, with no sign of economic revival managed an oversubscription on its five year bond issue by seven times. These are much higher subscription numbers than at the peak of the 2007 boom.
Hope rally beats fundamentals
But it cannot be denied that the Indian investor is currently only focussed on election results and is not willing to pay attention to the red flags both on the domestic as well as the global front. Markets discount future events and move from one end of the valuation band to the other depending on the economic cycle, often touching the extreme much before economic numbers reveal the truth. Markets currently are ahead of the economic fundamentals, even on a best case scenario (a clear majority to the NDA to form the government).
