Since Dec.2013, when BJP scored a 4-0 victory over Congress in the state assembly elections, India stock market is abuzz 
with excitement and in the last 3 months both the major indices (Sensex & Nifty) have scaled new heights. Most brokerage houses and analysts attribute this pre-election rally to the emergence of Narendra Modi as the undisputed leader of BJP and hope that the euphoria will continue post elections followed by a prolonged process of profit taking and correction and an initiation of a long-term bull market which will start in first or second quarter of calendar year 2015.
Pre and Post election rallies are common in India as stock market begins to factor-in the economic prospects after a new government is formed. Sensex collapsed 20% within a week after the 2004 surprise defeat of the BJP (popular perception among analysts is that it is CPI leader- a significant ally of the soon-to-emerge UPA government, A B Bardhan’s comment which caused a huge single-day fall in Sensex. When asked to comment on disinvestment policy, Mr.Bardhan is reported to have said “Bhaad mein jaaye disinvestment”) and surged by 17.2% in a short time when Congress won the May 2009 elections with better than expected number of seats.
Modi Factor
What is causing this surge in optimism within the investors’ community? Undoubtedly, it is the expectation of Narendra Modi taking over the reins of the country in a couple of month’s time. In a CEOs Confidence Survey carried out just before Modi’s candidature was announced, an overwhelming four-fifth of the CEO’s surveyed preferred Modi as the next PM. Corporate India, which has been at the receiving end of UPA government’s policy paralysis says CEOs have voted for a strong leadership, one who is decisive and firmly believes in rapid growth, which Modi has demonstrated in Gujarat. Even foreign brokerages have turned vocal on the preferences. A large Swiss based fund house, which advises some of the biggest foreign investors who put in their money in the country said that Indian stock market’s greatest hope is the emergence of Narendra Modi as BJP’s prime ministerial candidate. Revising its earlier estimates and opinion on India, global investment bank Goldman Sachs has raised its investment stance on India to ‘marketweight’. Why Dalal Street wants Modi to become the PM? First he has been able to instill faith among people about his ability to lead with speed. Second, people believe that he can give us a clean administration with the ability to implement plans. And third they believe in the Modi’s vision of a prosperous & strong India. There is certainly a feeling that the NDA is pro-business, and therefore everyone wants Modi to come to power as they think he will replicate the Gujarat growth model in the country. This is the reason why most companies have stalled their investment plans as they don’t have the confidence in the current system.
In the event Modi comes to power, he will kick start a moribund economy and make sure that GDP surges to 8%+ within 2years; infrastructure will get a much needed boost and reforms will be back on new formation’s ‘Fast track’. Of course, the new government will have to undo a lot of damage caused to the economy by the outgoing UPA alliance and inflation (largely dependent on ‘uncontrollable’ factors like the vagaries of nature and commodity prices) remains the primary concern in our monetary policy.
Retail Investors
What should a retail investor do? Retail investors have shied away from the market since the global financial meltdown of 2007/8 and Indian stock market is almost entirely driven by Foreign Institutional Investors (FIIs). Last calendar year FIIs invested over US$ 19 Billion in Indian market and this momentum continues. Analysts feared that once US announced tapering of Quantitative Easing (QE), there will be withdrawal of funds by FIIs and market would fall. But, that has not happened and Indian market has been adjudged the best performing market in last few quarters among the Emerging Markets (EMs).
There is no doubt that in recent times, investment in equity has emerged as the best asset class in so far as returns are concerned. Should retail investors put their hard earned money at stake when market is ‘over heated’? Is there a possibility that the current market rally is not based on fundamentals but is merely ‘Irrational euphoria’? Market is fairly priced at present and has already discounted Modi Effect. Will it rise any further? These are some valid questions that will certainly bother an investor. A discerning investor would keep in mind the following:
- Momentum is clearly in favour of NDA with people are yearning for a change and want decisive leadership at the helm of affairs. Risk of NDA falling short of a clear majority remains and in the unlikely event of a 3rd Front formation, the market will most likely nosedive.
- Return on investment is directly proportional to the risk an investor takes. If NDA succeeds in forming a government, there will be re-rating of P/Es ( on expectation of rapid growth) by fund houses and market will surge ahead.
- As already mentioned earlier, Indian market is being driven largely by FIIs. Market last achieved all time high in 2007/8 when Rupee was trading around 40-41 /1 US$, today it is in the 61-62 range. Even though, market has seen a fresh high last week, in Dollar terms the market is still 30%-35% away from its previous high.
- A retail investor would do well to follow the conventional wisdom of not “keeping all eggs in one basket”. Spread your investment to different asset classes depending on one’s financial commitment, age and investible surplus. Keep a minimum 2-3 years perspective for a better return on your equity investment.
- Do not succumb to the temptation of making quick money by Day Trading and investing in ‘Penny Stocks’ with dubious pedigree. Do your own research, check the company’s financials and make sure there are no governance issues. If you are unable to read/follow financial statements, stick to well known Blue Chip companies or better still, invest in Mutual Funds managed by well known AMCs.
Lastly remember the iconic words of Warren Buffet: “Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.“
————————————————————————————————–
Author : Chandra Maniar is FCA (Fellow of ICAI) & has worked in India & East Africa (over 23 years in EA, with almost 15 years as Group Mg. Director in a large conglomerate. He is an expert in ”Personal Finance” and “Retail Investors’. The writer does not represent any brokerage house or Asset Management Company He can be reached at his twitter account Chandra M @bharat_HDL
————————————————————————————————–
Related articles
- Modi’s Red Fort Debut - August 18, 2014
- What is Wrong With our Intellectuals-II - June 20, 2014
- Media Bias – Myth or Reality - June 9, 2014
A thorough article. Markets want Modi no doubt. Markets are always not driven by fundamentals and the recent highs without any substantial good news on economy (except on current account deficit front) is testimony of this fact. Rupee has gained below 60 levels. Euphoria is good but Modi has a difficult task ahead more so if a drought like situation emerges. Fingers crossed. But ofcourse confidence and sentiment will improve if Modi wins.
Very well explained article…..Thank you for sharing…….
Well-balanced view of the market. Elaborating on the dangers to be faced by the new Govt., it will be faced with almost bankrupt status with the treasury left to the last scrape and huge liability towards subsidies committed by UPA.
As you are an expert,you understand the financial matters much better than a layman like me.You have felt the pulse of the market and explained the swing which I have appreciated.
However,my guess is that the Indian economy has become so sick,it will take considerable effort and time of the new government to recover.Investors are shying away from India because of high corruprion Index of India.Unless the malise of corruption is addressed quickly and appropriately,it is doubtful of recovery of our economy.
Modi may have “SenSex” appeal but other party leaders specially Congress leaders have either “Son” appeal or just “Sex” appeal.