Eye On Election: Market Pullback Possible In Case Of Slim Majority, Says Saurabh Mukherjea

The markets are not fully priced in, especially during significant events like elections, according to Saurabh Mukherjea, founder of Marcellus Investment Managers.

The market veteran asserted that it is impossible to believe that everything is priced into the stock market.

If there is an uncertainty in the Lok Sabha election results, particularly if the ruling government's majority is not as "overwhelming" as expected, "we might witness a broader market pullback". In such scenarios, small caps are likely to bear the brunt of the downturn disproportionately, Mukherjea told NDTV Profit.

The chief investment officer pointed out that a small-cap rally in India might not be supported by fundamentals, saying it needs to be observed how it holds up during the six weeks of polling from April 19.

Inflation seems to have peaked worldwide and a global economic recovery is underway, with indications that rate cycles have peaked and interest rates are likely to decrease over the next six months, according to Mukherjea.

The CIO underscored that there are two different dimensions to consider regarding the polls, with the firstly being a worrying situation in small caps, which has not fully played out yet. He expects a further correction in small caps.

Conversely, Mukherjea sees an entirely different scenario for large caps, finding them very appealing and attractive, especially as global investors return to India. He predicts that these large-cap stocks will likely attract significant attention from investors.

Outlook On FIIs Flows

Mukherjea anticipates substantial flows from foreign institutional investors throughout the remainder of this calendar year and into the next financial year.

However, if inflation begins to rise significantly and particularly if there is a notable uptick in the 10-year US Treasury bond yields, foreign investors may become hesitant about investing in India, he said. "(If) Inflation situation behaves itself, I'm pretty sure we will get hefty foreign investor inflows in FY25."

If the incumbent government secures a strong majority in the election, India can expect significant foreign inflows. Undoubtedly, the majority of these inflows will gravitate towards large-cap stocks, which are consequently likely to experience a more decisive re-rating after the election, according to Mukherjea.

Regardless of the poll outcome, it will be prudent as investors to focus on accumulating high-quality Indian large-cap stocks. Exercising caution regarding small-cap valuations at this juncture is advisable, he said.

Watch The Interview Here