THE market may not be able to post any major gains post-May 16 since it has already factored in the formation of an NDA government though it may still have some upside if the NDA gets a clear majority. But a knee-jerk steep correction is waiting to happen if the NDA gets barely past 200 and is stranded somewhere around 200-225 seats. The Sensex, at the current PE of more than 19, is trading at a slightly higher level than the 10-year historic average of around 18.5. Macros have improved considerably and there is more stability around the world. Flows into emerging markets have improved, giving them the taste of a bull market amidst a scenario of high inflation and low growth where small investors are sceptic and domestic financial institutions are turning net sellers. This may partly be due to the lack of faith market players have in the projections made by opinion polls —a case of once bitten twice shy, and here in fact twice bitten since the projections were way off the mark in both the previous polls of 2004 and 2009. Any shortfall in the NDA’s clear majority is likely to substantially dilute its policy stance. Also, the market is not really expecting any path-breaking changes in the near future since it would not be easy for the new government to fix all that has gone wrong with the economy in the short term.
The forecast of a below normal rainfall may not have any direct adverse effect on the market as the historical data suggests. It may, however, still impact sentiment and inflationary expectations of food prices curtailing elbow room for the Reserve Bank of India (RBI) to go in for any rate cuts. The Consumer Price Index (CPI) has remained stubborn at around 8 per cent coupled with declining economic activity and slowing non-food credit growth. Besides, the International Monetary Fund (IMF) has warned that the high debt of some Indian companies may pose a risk to the country’ s economic stability since a third of corporate debt in India has a debt-to-equity ratio of more than three—the highest degree of leverage in the Asia-Pacific region.
In this regard, it is worth noticing that the non-performing loans of the banking sector stand at 12 per cent of outstanding loans and are likely to reach 20 per cent soon. Even if 20-30 per cent of them turn into default, around 5-6 per cent of banking capital will get wiped out.
The global scenario is also not looking too rosy. US stocks are at their peak valuation amidst gradual tapering and rising interest rates and mortgage loans have plunged to the lowest in the past 14 years. Our market may not have risen in tandem with the rise in US markets, but it is bound to fall if there happens to be a steep correction overseas.
On the positive side, the growth target has been revised by all those who track the Indian economy. The corporate results of Q4, FY14 declared so far have been good. With the tendency of the market to run ahead of fundamentals, a strong government at the Centre may still leave some scope for a re-rating of the markets. I still hold the view that investors should wait till good days actually come.
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