Markets Weekahead: A decisive mandate for equities

May 18, 2014

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Not even exit polls could have predicted the landslide election victory that ‎has put the BJP’s Narendra Modi in the driver’s seat for India.

The Nifty, after the initial euphoria of a 6 percent upswing, ended Friday at 7203, merely 80 points higher than the previous day. It was a typical “sell on news” phenomenon.

Hindu nationalist Modi gestures to his supporters during a road show in New DelhiThe clean sweep for the BJP has increased expectations from the new government and  does not leave room for excuses. The prime minister’s chair will test Modi’s ability to deliver on a national platform.

The next few days would be the honeymoon period and after the initial revelry,  people would closely watch the process of government formation and the new ministers who will take up portfolios such as finance, home, defence and external affairs. We would also need to see how Modi sets the framework for the revival of fast-paced economic development. It’s easier for him because of the decimation of various ruling governments at the state level.

The economic situation on the ground is far from the sentiment displayed in the stock markets, with industrial production yet to show an uptick while inflation continues to be a concern. The interest rate scenario may not be benign unless monsoon fears are belied and inflation cools off. The expected appreciation of the rupee to 55/56 against the dollar will not do the IT, Pharma sectors and exports any good.

India’s need of the hour is a decisive leader who can implement promises without a hitch. The current mandate provides that. It’s going to be easier said than done to get the economy firing from all cylinders in the near future. But the markets will continuously gauge whether intent is getting converted into action with the same intensity.

The immediate task for the new government would be to contain fiscal deficit, current account deficit and make the right noises to avoid a downgrade. The pricing of Reliance Gas pricing could be the first contentious issue that they would have to deal with and this again would be closely watched.

Brokers trade on their computer terminals at a stock brokerage firm in Mumbai. REUTERS/Danish Siddiqui/Files

The budget would be slated for July and markets will start building up positions for that event in the next few weeks.

Based on the Gujarat track record, assuming that Modi and his team would deliver as promised, we could safely assume that we may see a multi-year bull market. We could see consolidation over the next few days which could be utilized to build the portfolio. The El Nino effect on the monsoon is still a reason for worry but that could provide investors an opportunity to buy on dips.

The focus in the coming week would be on sectors such as banking, infrastructure and capital goods. During the last few weeks, I had suggested profit booking due to the uncertainties of election results, but now with a clear mandate, equities would be the best asset class for the foreseeable future. If you were skeptical in the last few months, it’s time to shed your fear and take the plunge.

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