An unprecedented victory for NDA in the elections cast a spell of fresh euphoria in the equity markets on May 16, which led to BSE Sensex scaling a new high of 25375 and Nifty breaking the 7500 barrier to top out at 7557 levels. Most analysts have heralded this move as the start of a multi year bull market for Indian equities. A large section of the retail investors are feeling left out or 'having missed the bus'. What lies ahead for the equity markets after a path-breaking election result?
The election results have thrown a clear mandate in favour of one party after a gap of 30 years, during which the nation experimented with various coalition Governments. With the election results out of the way, markets will now focus on the economic developments: like Fiscal consolidation, GDP growth, Inflation management, Currency movement coupled with signals on the progress of monsoon. The track record of the previous Govt. in the past few months can be considered satisfactory in terms of having controlled the Current account deficit (CAD) and Fiscal deficit to a large extent. However, it failed to curb inflation, much of which is due to global factors. Indian Rupee has started to appreciate and any further appreciation beyond a reasonable level of Rs.58/$ could be detrimental for the economy as it may start hurting our exporters. Inflation management will depend largely on the progress of South-west monsoon with the threat of El Nino looming large at this juncture.
How would the markets move in the near term, say next 5-6 months? It seems the markets have fully discounted the formation of a strong Modi-fied Govt. in the next few days. So in the immediate future markets may consolidate in a close range or may go down a little after the initial euphoria. Sporadic bursts of euphoria could be dictated by the choice of key ministers like Finance & Commerce. In my opinion the markets have made an intermediate top at 7557 on the Nifty on Friday. But as a new bull market has started, the top of the previous bull market (at 6357 Nifty) would serve as a strong support on the downside. From an earnings perspective (discounting on the basis on FY 14-15 Corporate numbers) 6600-6800 could be considered as a pivotal fair value for the Nifty. The next trigger for the markets would be the presentation of Union Budget in July 2014, as also the earnings for Q1 which would start flowing from 2nd week of July. Satisfactory progress of monsoon is a necessary pre-condition for a bull run to sustain.
The probability of major indices moving up much higher seems capped due to the fact that while Banking, Infrastructure, Oil & Gas sectors would outperform the market, IT, Pharma, Metals would prove to be a drag in the short term due to Rupee appreciation. It is anticipated that Nifty may move in a wide range of 6350-7550 during the next 6 months. Those individual investors who feel that they have missed the bus could wait for some correction before committing fresh funds in the market. Please avoid the temptation to enter the markets at higher end of the range, only to regret later. It may be worthwhile to consider buying stocks from IT space on declines.
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