By Ankit Doshi
Despite the sharp surge in stock prices that has driven up the indices by 7% in just three sessions, the Street believes there’s more steam left in the rally. The confidence stems from the results of the exit polls that suggest the National Democratic Alliance (NDA) will form the next government; foreign institutional investors continue to shop for Indian stocks, having pumped in close to $6 billion since the start of the year.
With all the five exit polls released on Monday predicting a strong win for the BJP led-NDA with a tally of anywhere between 249 and 289 seats in the 543-seat Lok Sabha, the Sensex raced past the 24,000 mark on Tuesday before coming off a bit and closing at a new all-time high of 23,871 points, up 320.2 points over Monday’s close. The broader 50-share Nifty ended the session at 7,108 points, gaining 94.5 points. The Sensex has added a whopping 1,526 points in the last three sessions but remains the second-best benchmark gauge in the region after Indonesia. While the Indian market has returned 12.7% since January this year (in dollar terms), Jakarta has yielded 15.14%.
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“We believe that even the lower-end number of 249 is in line with the market expectations. The exit polls indicate that NDA will be able to form the next government without much trouble and will leave enough flexibility with Mr Modi to pursue his growth policies,” a CLSA report released on Tuesday noted.
Bank of America Merrill Lynch (BofA-ML) has raised its year-end target for the Sensex to 25,500 from 23,500 earlier, pencilling in an 8% gain.
“Near-term, the market is discounting a lot of the good news and the margin for error appears low. However, if the exit polls are accurate, a stable government seems to be a likely prospect. We think the markets will trade at a premium to long-term average through 2014 as investors anticipate a spate of reforms which lead to a turn in the economic cycle,” BofA-ML head of research Jyotivardhan Jaipuria wrote.
Nomura Capital (India) expects another 10% up-tick, and has set its year-end target for Sensex at 27,200 (earlier 24,700) if the election results are in line with expectations. “If the exit polls are right, then a majority for the NDA government will be taken very positively by the markets,” the firm’s analysts commented.
Last Friday, Macquarie Capital Securities (India) said it was positioning for a 10% jump. “Once a clear indication of a stable government emerges, which is our base case, the markets can go up further. A stable government in 2009 re-rated markets by 27% and the markets sustained an average 16.5x multiple for the next 18 months. We think multiples still have room to move up over the next few months from the current 13.8x to around 16x or ~15% higher,” Rakesh Arora, MD and head of India Research, Macquarie wrote.
Swiss investment bank Credit Suisse remains cautious given the high uncertainty over exit polls and the final results. “May 16 results may still throw surprises and Credit Suisse stays cautious on cyclicals. High uncertainty remains over actual results due to variation in state-level exit polls, which suggests high error margins, while median of polls is ‘meaningless’ as shown in 2009 and 2004 results,” the bank said.
BofA-ML too warned the market could correct 15-20% if the results, due on Friday, show a shock result. “Markets could correct by 15-20% in case of fractured mandate. Most exit polls have predicted a majority (or close to majority) for BJP-led NDA. However, exit polls have a checkered past as far as their reliability is concerned,” the brokerage added.