The political uncertainty, which has been plaguing the markets for long, is over and we have a new government in office. The people of India have given a clear mandate for the NDA to rule the country for a second term. It is time to leave political acrimony behind and focus on governance. Let us hope that the new government will rise to the occasion and focus on fixing the economy and accelerating growth.
The market responded to the exit polls with best-in-ten-years single day rally with the Sensex vaulting by 1422 points on 20th May followed by profit booking on the results day. The important question now is: will the rally sustain? The major factor constraining a sustained bull-run in the market is the poor earnings growth. During the last five years, even though the nominal GDP growth has been impressive, earnings growth has been tepid, resulting in high valuations. If the market is to move to a higher orbit and sustain there, earnings have to improve. The big question, therefore, is what the new government can and will do to stimulate growth and support earnings.
There are factors beyond any government’s control. For instance, if the trade skirmishes between US and China aggravate into an all-out trade war, it will impact global trade, global growth, earnings and markets. It is important to understand the fact that there is a huge overhang of liquidity globally – the consequence of the QE implemented by the Fed, ECB and BoJ following the global financial meltdown of 2008 and the global recession that followed. Economic crises, like a full-blown trade war between US and China, can trigger shifts in this humungous liquidity, roiling equity and currency markets globally. Governments should be guarded against such eventualities, particularly since leaders of some powerful nations are exceptionally strong men wielding enormous power. Yet another potential destabilizing factor is crude. Sharp spikes in crude, as we have experienced in the past, have the potential to trigger India’s ‘twin-deficit problem’ – high fiscal and current account deficits – thereby impacting economic growth, corporate earnings and the market.
Even while preparing to manage such eventualities, if the need arises, the new government should focus on improving governance and accelerating growth. The short-term trend of the market will be influenced by global factors like the trade skirmishes and domestically by the actions and policies of the new government. There is every reason to remain bullish on India. The economy is strong enough to overcome the short-term headwinds and cruise towards sustained long-term growth, which will take the market to much higher levels. Therefore, unmindful of the short-term volatility, investors should remain invested and continue to invest systematically.
The cover story of this issue is on ‘‘Challenges facing the new government”. Governing a huge and complex country like India with its incredible diversity and plurality requires tolerance, vision, wisdom and a high level of political sagacity and managerial competence. Let us hope the new government will rise to the occasion and wish the PM and his team all the very best.