Indian stock markets have registered over 10 per cent growth in the last three months, but with ten days to go before results are announced on May 16, there’s a sense of caution on the Street. The Sensex posted its biggest weekly loss last week as investors booked profits after recent gains.
Most Opinion polls show that the BJP-led National Democratic Alliance, with Narendra Modi as its prime ministerial candidate, is likely to emerge victorious in the elections, but there are concerns that markets have factored in the most optimistic political outcome and any disappointment in terms of election results will be a big setback.
However, Prabhat Awasthi, head of equities at Nomura told that markets have not yet factored in a bullish economic outlook, which a BJP led government can bring to the country by removing policy bottlenecks.
“The fact that market has rallied cannot be attributed to political situation only… As rupee strengthened from its low in August, balance of payment crisis has improved considerably and stability in the global markets has also played a role in it” Mr. Awasthi says.
The fact that the current rally is mainly driven by defensives and to some extent by export oriented stocks suggests that markets are not at all bullish, he added. Besides, markets are currently trading at 13.6 times their FY15 earnings, which is the same as a year back, he said.
Mr. Awasthi says PSU banks are trading below their book value, which suggests that markets have not yet become bullish. If markets would have been bullish then PSU banks would have been trading at a much higher level. If we get a stable government led by BJP at the center then markets can move up further, he added.
Asked whether markets will correct if NDA gets less than 220 seats, Mr. Awasthi said, “Market really does not bet on seats rather market is dependent on economic outcome that flow from the political outcome. If with 230 seats, NDA is able to give a stable government at Centre…with reasonable freedom and can take reform oriented decisions, then market is fine with it.”
According to Nomura, there’s 50 per cent probability that the BJP’s Prime Ministerial candidate Narendra Modi would be able to pursue reforms, cut red tape and boost investment in infrastructure.