I have previously talked about trading or speculative opportunities in the PSU stocks, primarily due to political expectations. At this point in time, the market expects that new highs are set to be touched. And yes, the PSU stocks are rising.
Now that there is a stable government, the markets continue to be tearing along, setting new records every session. It is as if the companies are now headed towards a perpetual 30 to 40 per cent earnings growth simply because someone else is in charge at Delhi.
If this trend persists, all that one can say is that at some point, prices will have to wait for earnings to catch up. It could be very long. Pure sentiment on the happening of a change in the political seat of power has its limitations. It may mean a structural change in the economics of the nation’s growth and fiscal deficit. To me, it means an improved environment for investment. It does not automatically justify paying higher prices for the same earnings.
Yes, there will be some runaway gainers, where realignment of expectations ignites a burst in prices. It could be stocks in infrastructure, commodities, PSUs etc. Also, given that the NDA has spent a fortune on this election campaign, surely there have to be favours which would be called in. So there will be some businesses, which make extra normal gains. The foreigners will pour in some money in to the markets and wait for the first budget to figure out the economic soundness of the policies of the new government.
The first reality check would be the budget. The economic revival of India should be on, given the abyss from which a new government would be starting. However, there have to be some moves, which the NDA used to oppose for the sake of opposition, but are necessary to signal confidence in policy making. This would be in areas like implementation of GST, FDI in retail; removal of some subsidies, doing away with unproductive populist schemes of the previous regime and balancing the budget or keeping deficits to reasonable levels. Yes, there would be some natural comfort with the strengthening of the rupee.
Containing inflation is going to be a big challenge. It may take two to three years before economic policies have their impact on industry and business. As a corollary to high inflation, I do not expect interest rates to soften much. There could be some tokenism but I do not expect interest rates to move by more than a couple of percentage points on the lower side, in the next two years or so.
Of course, most good tidings are on the assumption that the government would be stable, not pressurised by its partners and not a socialist leftist attitude. Speculative plays in infrastructure, PSUs etc are dominating the market at this juncture. So, in a sense, the ‘Modi’ wave has already hit the shores of the stock markets.
I would wait for signs of revival in capital spending, containment of fiscal deficit, a clear trend of falling interest rates and inflation, a revival in IPO issuances etc before increasing my exposure to equities. It is never a great time to buy when everyone seems to think so.
The one thing to keep note of is that if you buy high quality stocks (high ROE, history, no debt etc) you are unlikely to lose your wealth. If you buy poor quality, do it with the knowledge that stocks can lose even all their values.
(The writer is an independent analyst and can be contacted at
balakrishnanr @gmail.com)
