Straight from the Specialists
Markets Weekahead: After new Modi govt, correction to continue for a few weeks
(Any opinions expressed here are those of the author and not of Thomson Reuters)
After a dream run for markets, we witnessed a correction last week with the Nifty declining about 1.86 percent to close at 7,229. The smaller stocks also paused — the NSE mid-cap index lost about 4.5 percent.
Incidentally, India entered the top 10 markets in terms of market capitalization and we should soon cross the market capitalization of US $ 1.5 trillion once the upswing resumes.
Till late last week, it looked that the honeymoon would continue for a while. But, neither politics nor markets remain in a constant mode. The markets seem to have discounted the best possible scenario of implementation of manifesto promises and the economy getting back on growth path.
The first signs of correction were seen on Monday before the swearing-in of the new council of ministers – the reaction seemed inverse of the May 9 movement when the markets seemed to have got the whiff of the exit polls and a new rally had started. Now, the first phase of the welcome rally seems to be over and we should be entering into a phase of consolidation.
The macro numbers are far from encouraging with the GDP at 4.6 percent. Though it could be brushed aside as the “skeletons of the past”, it points to the fact that it could be a rocky road to recovery. Consensus expects RBI to hold rates on June 3, but Governor Raghuram Rajan has the tendency to surprise the markets. If there is a hike, it could be the last one.
The budget would provide the road map probably though cuts in welfare spending. It needs to be seen how Narendra Modi will deal with the welfare schemes of the previous government. It’s believed that there would be immense focus on infrastructure which should help kick start the economy and generate employment. With complete control and a rattled opposition, it is expected that Modi and his team would move fast and push their agenda.
It would be an onerous task for Modi to replicate the Gujarat model as it may not be as simple as it appears on paper. He would have to deal with a number of difficult state heads. The composition of the Rajya Sabha would be one of the irritants for him as majority of the seats would remain with the opposition for the next two years. One also needs to closely watch the role of Rashtriya Swayamsewak Sangh (RSS), the parent body of BJP, in formulating policies and directing the government.
I, like the rest of Indians, hope this government meets the high expectation the electorate has thrust on them, but as investors we need to take a practical view of the ground level situation to ascertain the valuation mismatch.
The euphoria has engulfed penny stocks as well as those with questionable credentials which is normally witnessed towards the end of a bull run. On the other hand, most of us have been expecting a multi-year bull run since the election results. This is a dichotomy. The markets seem to have run ahead based on high expectations due to which I expect the correction to continue for the next few weeks. We could see a sharper correction in low quality mid- and small-cap shares.
Nifty is expected to be in broad range of 7000 to 7550 in June. The breakout beyond 7550 could be triggered by the budget and/or the monsoons. Going ahead, the markets will distinguish quality and the longer term bull market would be on a firmer ground. It’s time to clean up the duds which have sprung to life and buy quality, albeit on a correction.