THE market is witnessing an unprecedented bull run post the BJP coming to power in four of the five states that have gone to polls recently for the simple reason that investors have started presuming a big win for the BJP in the 2019 general elections. Also, by that time, the BJP is likely to cross yet another hurdle of having a clear majority in Rajya Sabha as well giving it the full freedom to go in for bolder and big ticket reforms. If at all the market witnesses any correction, it would be more due to global reasons than domestic ones. The bull run may otherwise continue uninterrupted despite the valuations looking a bit stretched and there being urgency for the earnings to catch up. The BSE Sensex is trading at a PE of 22.3x Fy17 and 18x FY18 earnings. The mid-cap index is currently at 30.2x and small cap index at whopping 64.5x
But investors should keep one thing in mind that stretched valuations may continue for longer than what most analysts may believe since that may be governed more by liquidity that happens to be in abundance and the fact that India continues to be a sweet spot in the world devoid of worthwhile investing stories. Also, though the investment cycle may not pick up any time soon due to stressed balance sheets of the banking sector and lower than optimum capacity utilisation in many of the industries/sectors, consumption has bounced back post demonetisation. Exports too have shown promise by registering high double-digit growth in February. The de-leveraging of balance sheets and softening of interest rates are likely to be soon reflected in earnings. With both operating and financial leverage playing out for companies, corporate earnings will get a boost.
Global news has by and large been benign especially post US elections, though concerns are being raised over the effectiveness of policies of the US administration or reforms getting delayed. News from China too has fairly been positive and most of the concerns appear to have been discounted by the market. However, analysts are of the view that looking to the current valuations, the market may struggle to give any worthwhile returns in FY18. The earnings estimates too have been downgraded for FY18 and FY19 mainly due to lack of private corporate investment and implementation of GST that may cause inflation to rise and growth to moderate. Strong FII inflows have made the rupee one of the best performing currencies in the world, though higher US bond yields and a stronger dollar may cause some concerns for emerging markets.
The country may see considerable progress in reforms like land acquisition, labour reforms, foreign direct invetment, crack down on corruption and black money, and reforms in governance aimed at ensuring effective delivery of government services. Investors are advised to take stock specific investment calls with a time horizon of 2-3 years since the corporate sector is going to benefit largely due to the measures taken to widen the ambit of the formal economy and shrink the informal economy.
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