Exit polls suggest continuity of the BJP-led NDA. Another term for a stable government at the centre would mean continuity of the expensive valuation multiples of Indian markets. That, in a nutshell, is what will drive markets in the medium term.
Remember, in the longer term, markets are slaves to earnings. But for now, the sentiment and beliefs around policy continuity, macro stability led by fiscal prudence (a cornerstone of the last few budgets), confidence among foreign and domestic investors leading to potential for sovereign rating upgrade and some other factors will all be in sync with the fact that the premium Indian multiples will have strong enough reasons to sustain vis-a-vis other emerging markets as well as relative to historical averages.
Immediate reactions will be positive and will lead to further momentum on the day of the counting if the BJP crosses its 2019 tally, which seems very likely based on the exit polls. This could take the Nifty to new highs easily, but eventually one should not rule out a bout of profit booking as reality sets in on valuations and limited headroom for upsides.
The one thing to watch out for in the budget would be anything around capital gains taxation, for that may prove to be a spoilsport in the short term.
From a trade perspective, FIIs are at historic index shorts (USD 2.8bn), which is in a way a hedge for their single stock futures longs (USD 4.7bn). Expect some strong bouts of short covering, which may even get done very swiftly. Hence, its almost difficult to say whether the mix of short covering and new longs will get exhausted in a day or will continue for a few days.
Having said that, a 750-1000 point uptick on the Nifty will draw in some caution on the valuations. FII heavy sectors and stocks might be the ones which draw the maximum interest. From a slightly medium term perspective, FPIs ownership of Indian equities is running at multi-year low, which should likely increase.
There have been other solid markets like Japan and US too, but it would be only fair to assume that most people would not want to miss the India story here on.
From a policy perspective, Modi 1.0 focused on structural reforms and Modi 2.0 focused on bringing in efficiency through digitisation, formalisation, Gati Shakti and more, and creating a base for manufacturing growth. Likely that the pet themes of defence, climate change and manufacturing in India will remain centre stage.
It is very likely that because the Government has spoken about the fiscal glide path and the lower fiscal deficits, the emphasis will growth aids will shift to the monetary side. The other non-policy variable is whether private capex, which was there in fits and starts, makes a strong comeback. Was that capital waiting for policy continuity to be affirmed?
Usually that is not the case, but maybe this time there was? Time will tell, but it is a safe assumption to make if growth sustains.
What about sectors?
Will the markets want to double down on bets on sectors that have done well? Or can the markets think differently?
Well, a lot of it would depend on policies. There is a quarter of markets which says that 3.0 may bring the zing back into consumption. My bet is that there will be continuation of the past policies.
The reason is that while markets may look at the 'BJP in power' in five-year blocks, the BJP itself does not think like this. And the bets taken in the last five years on sectors with an infra or capex push are not short-term bets. These are long gestation sectors with a long outlay of capital requirement. My bet is that policy and markets will double down on infrastructure and capex related themes, even as consumption may make a natural comeback, led by base effect and some policy measures for rural strength.
There might be greater emphasis on making the defence leg more successful, and ensuring that manufacturing success is here to stay and thrive. And while policy does give that push when the budget speech is delivered, markets may want to bet on continued optimism on the premium multiples in this space.
Power, for example, needs circa half a trillion dollars worth of investments, and it would be difficult to think of the government taking the foot off the pedal in these sectors.
Markets aside, this verdict demolishes some of the narratives. The Noth-South divide, rich businessman gaining at the expense of the poor upsetting the voter, urban versus rural divide - all gets negated. If the nation can manage fiscal consolidation with a growth push that is strong enough to absorb the labour force of the country, then it could mean a very promising next five years for growth and for equity markets. We all hope so. Godspeed - to the new government.
Niraj Shah is Executive Editor - Markets at NDTV Profit
