While there may not be much volatility in the markets following the strong and clear mandate, there may also not be much to gain from here in the short-term as the Sensex has already risen by 20 per cent in the last three months.
A strong government augurs well for legislative and administrative reforms and gives the mandate to take strong steps that provides the necessary ingredient for investors to get into domestic equities with a medium- to long-term perspective.
Around 10 am on Friday, as soon as clarity emerged that BJP-led NDA was getting a clear majority on its own, the Sensex jumped by 1,470 points or 6.1 per cent to hit its peak of 25,375 points. But after that, profit-booking triggered a correction forcing the Sensex to close the day at 24,121 — a gain of 216 points or 0.9 per cent.
Experts warn that if you have missed out on this rally do not try to chase. “If investors buy now because Modi has come in power, it will be a mistake as markets have already had their run,” said Parag Parikh of PP Financial Advisory Services.
In a matter of six trading sessions the Sensex has risen by 1,777 points or 8 per cent and over the last three months it has jumped by 20 per cent. While the markets have had their run there may be more for them in the medium to long term.
“The new government has an unexpectedly strong and positive verdict. In six months time, when assembly elections are due in several states, the BJP could win and strengthen itself further. With the same party/alliance in power in the state as well as the Centre, strong Centre-state co-ordination is possible. Thus, after nearly 30 years we have a government that has the numbers to go for meaningful legislation and administrative changes. This can be a basis for strong reforms,” said Neelkanth Mishra, head of equity strategy- India, Credit Suisse. “It is therefore a good time to be constructive on the Indian economy and also the equity market. However, rather than rushing in to invest on knee-jerk assessments, investors should get into good stocks and sectors for the long-term,” he said.
While there may be some corrections in the market on account of profit booking, experts say that there may not be meaningful correction because of the exceptionally strong mandate.
“Markets may consolidate near current levels … The fiscal discipline promised by the party could strengthen the argument for interest rate reduction in due course, which would make equity more attractive in relation to fixed income,” said Anup Bagchi, MD and CEO, ICICI Securities.
If investors need to practice caution and not chase fancy stocks that are trading at high valuations, they must do their homework and go for value picks. “Even mutual fund investors should invest in good schemes that follow value investing,” said Parikh. Analysts suggest that defensive sectors like pharma, IT and FMCG may take a back seat and the balance would shift towards sectors linked to domestic investment and infrastructure.
“Investors should continue with a staggered buying approach, and any near term correction may be used as a buying opportunity in high beta, capital intensive companies with robust balance sheet,” said Bagchi.