The weaknesses in the Chinese, Russian and the developed markets saw money moving into select markets including India. FII flows and a strong rupee helped the BSE Sensex to cross 22,000 for the first time in March. Last week the BSE Sensex touched a new all-time high of 22,040.72. The BSE Sensex in February and March has been rising higher and higher. In fact, month-on-month, from a low in the beginning of the month to a high towards the end of the month, the BSE Sensex has gained over five per cent in both February and March.
The rise could well be a pre-election rally. The market expects the Narendra Modi-led National Democratic Alliance (NDA) to get a clear majority and come to power at the Centre. The market knows that the NDA does not have a magic wand that can change the current slowdown into fast growth. It will take time for the economy to recover, but the confidence the market is showing in the NDA is because of Modi's track record in Gujarat as well as the previous stint of the NDA government (from 1999 to 2004) which had got India on a fast track. If Modi comes to power he will also be starting with a clean slate without the baggage of scams and corruption the UPA has, which will help him to drive economic reform and growth.
In fact broking houses have been advising clients to stick to equities. If the NDA comes to power many see a two to three year bull run for the market in India. Rajesh Iyer, Head of Investments and Family Office at Kotak Wealth Management has recommended to its high net worth individual (HNIs) clients that they deploy 100 per cent of their funds in equities as he sees the upside risk in equities far higher than the downside risk. If the NDA comes to power he expects a 15 per cent year-on-year return for the market for two to three years.
But there might well be a 10 to 15 per cent correction in the near-term if a non NDA government comes to power. On most valuation parameters ranging from price-to-equity (PE) ratio, price to book value (Price/BV), EV/EBITDA to Market Cap/GDP, the Nifty is trading below its five and 10 year averages. Excluding the PE ratio, on most parameters, Nifty trades at 15 to 25 per cent discount to its 10 year average. With the Sensex hovering at 22,000-mark, investors should be guarded on their optimism and keep room for safety. Rather than trading, investors should invest and stick to large blue-chip stocks.
In the coming week, the market is expected to remain volatile ahead of the F&O expiry on Thursday, March 27. Until the outcome of the general election, the Indian market will remain volatile reacting mainly to global cues, currency and FII flows. Last week the US Federal Reserve, according to its plan, reduced the bond purchase program to $55 billion. Every six weeks, the US Fed plans to reduce the bond purchase by another $10 billion. However with the US economic indicators still not showing signs of a complete recovery, some quarters feel the Fed will continue easy monetary policy. Meanwhile the US will release its GDP data on Thursday, March 27. On Monday, March 24, the Eurozone will also declare both its manufacturing and services PMI figures and China will release HSBC manufacturing PMI.