First crucial indicator for market would be budget: Macquarie

May 12 2014, 13:23 IST
Comments 0
Post-elections, the market rally may continue to build on by about 5%-10% primarily via multiple expansion. Post-elections, the market rally may continue to build on by about 5%-10% primarily via multiple expansion.
SummaryLok Sabha elections outcome could take markets higher by 5-10%, believes Macquarie head of research.

Election outcome could take markets higher by 5-10%, primary via multiple expansion, believes Rakesh Arora, MD & Head of Research with Macquarie. In an interaction with Devangi Gandhi, Arora discusses investor expectations from a favourable election results, possibility of expansion in market multiples and his outlook on various sectors. Excerpts:

How do you see the market behaving hereon?

It all depends on the expectations of the recovery process and how fast it is going to be. Historically markets tend to discount it ahead of the actual numbers. The average multiple for the market (Nifty) for the last 17 years is 14.5 times and currently the market is trading at multiples of 13.8-14 times, so there is still a 5% discount to the long-term valuation. We have observed that amidst strong positive expectations, the multiple goes beyond that average, for example, a stable government in 2009 re-rated markets by 27% and the markets sustained an average 16.5x multiple for the next 18 months. So, considering the strength of expectations currently, we think the market should trade anywhere between 15 and 17 times and that's why we have talked of a likelihood of 15% gains. Our target price for the Nifty is 7200 which equals a multiple of 15 times but there is a chance that it can get extended if we get a strong government and people start to believe that it would start taking action fast enough. In this case, post-elections, the rally may continue to build on by about 5%-10% primarily via multiple expansion. Opinion polls from January through April suggest steady gains for the BJP-led NDA and we think markets are pricing in around 230 seats, which is also our base case.

What are the key positives the street expects from a favourable election outcome?

It is difficult to quantify how things will move and that is why post-elections, the first crucial event would be the Union budget, which would come out in early July and give us a clear indication as to how the government wants to take short-term and long-term measures to tackle the fiscal situation.

On the inflation side, we expect that it would remain benign for the next two to three months due to the base effect. Beyond that, the large part of food inflation is because of food grain prices. What will set the expectation on the food side is whether or not the new government

Single Page Format
Ads by Google

More from FE editor's picks

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...