From the beginning of February 2014, the Sensex rallied nearly 18 per cent on the belief that the NDA would be able to form the next government out of which 7 per cent accrued post the release of the exit polls on May 8. Final tally of the NDA did not disappoint investors as they won an unprecedented majority which will ensure that the government does not have to suffer the untenable and destabilising effects of post-poll alliances.
Flow data indicates that foreign institutional investors (FIIs) have been heavy buyers in the pre-election rally ($6.6 billion) while domestic mutual funds sold equities worth $125 million indicating poor participation from retail investors. Reports of large number of demat account closures further substantiates retail investor apathy towards equities as an asset class.
Given the clear mandate and the track record of the prime ministerial candidate, we can expect the new government to swiftly demonstrate their superior governance and execution skills by (a) streamlining and fast tracking pro-growth and development policies including the those initiated by the previous government; (b) build healthy CentreĖstate relations; and (c) create a conducive working environment for the bureaucrats.
With a stable government in place, we believe that (a) equity markets will extend their momentum; (b) factors (high beta, average fundamentals and value) that lead the rally since early February will continue to do so; and (c) cyclicals will outperform defensives.
Large caps will lead the rally which will be followed by a rally in mid caps and small caps with a lag. FII flows will continue as a stable government and Indiaís relative out performance to emerging markets to bolster flows.
In the final Budget 2015, we expect the NDA government to (a) clearly articulate their economic agenda; and (b) provide a road map to improve the quality of fiscal deficit by productive spending and raising revenue sources.
We also expect fast tracking of stalled projects at the ground level to provide impetus to growth and employment. Auction of natural resources in a transparent manner to augment government revenues and attract investments.
We expect Nifty to scale 8,100 by year end. Retail investors should make a comeback to equity this year.
Rising food prices due to El Nino effects, sticky core inflation, slow industrial growth and the actual performance of the government falling below expectations are the downside risks to our Nifty target.
ó Ravi Sundar Muthukrishnan & Vinod