The next three months are crucial for Indian markets, says Kotak Securities, as all the positive events are already factored in while the risks from continued policy ‘drift’ in the country are being largely ignored. In a strategy report titled “See you in three or 18”, Kotak Securities says that unless there is an improvement in macro factors and end of policy paralysis in the next three months, India may have to wait for 18-21 months for further economic reforms.
India faces several state elections over the next 18 months as a prelude to national elections in May 2014. India’s dysfunctional politics has stalled important reforms for the past few years, which may continue till elections are over, says the report.
Further, the negative perception of India is hardly visible in valuations, with most large companies trading at rich valuations given their earnings growth. Even defensive stocks have run up sharply in the last four-five months, leaving little room for further re-rating given their rich valuations. According to Kotak, the market seems to be factoring in a pick-up in improvement in macro factors, an end of policy paralysis and continued largesse of global central banks.
Kotak Securities has identified four reforms that may determine if the Indian market holds up or comes off over the next three-four months. First, is the progress on GST, which is important for boosting long term tax-GDP ratio, but more importantly it will show that the Indian political environment is functional. Second, a hike in fuel prices will reduce deficit and at the same time give confidence about the government’s ability to take tough decisions.
Third is the critical power sector reform which is important to arrest the rising non-performing loans (NPL) cycle. Finally, action is needed in FDI reforms which will provide visibility on long-term capital flows that can provide stability to balance of payments and currency.
At the current levels, the Indian market is not particularly cheap in the context of its historic trading range and relative valuations to other emerging economies. Kotak Securities is of the view that it may not be a bad idea to lock in some gains for the year.
