The trend indicated by the exit polls has been confirmed by the resounding mandate to the NDA government. On 20th May the Nifty responded to exit polls by zooming 3.7 percent or 421 points to record the best performance in 10 years and this was followed by profit taking on actual results with Nifty declining by 80 points. It was mentioned in my previous letter that, “it is likely that all the good news will be in the price by 23rd.” In the course of the day the Sensex touched the magic mark of 40000. The big question is: what next?
Political stability is, indeed, good for the market. In the short run, the market is driven by sentiments and in the medium-term hope can sustain the optimism. But, in the long-term only earnings can drive the markets. In the absence of earnings growth, the euphoria will disappear. Therefore, investors should be guarded in their approach to markets.
Fundamentals do not warrant a sustained rally in the short run. There are major headwinds being faced by the economy and these do not have quick fixes. The economy is slowing down and this year GDP growth may even go below seven percent. The NBFC crisis is a serious issue weighing on the economy and markets. The global environment also is not very favorable with global growth slowdown, trade skirmishes between US and China and the US-Iran stand off.
NDA 2 is likely to initiate major reforms very soon. A strong government can initiate tough reforms. If the new government does this, the hope rally will continue. At the same time since the valuations remain elevated negative triggers can lead to corrections.
Remain bullish on India
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.