The direction for the market?

Apr 06, 2015 | 12:34 PM IST

I made a presentation sometime in 2013 to a group of investors in Pune. It was just a year before the Lok Sabha elections in India were due. The topic of the presentation was pre-election year performance in Indian stock market. The presentation covered an analysis of 6 pre Lok Sabha election years. The analysis considered socio-economic background around each election year, world economy and political situation and the performance of Indian stock market during these Lok Sabha elections. My analysis was dot on. The analysis was telling me that the Indian equity market has never let down the investors in Lok Sabha election year. The primary reason being hope!!! Each election brings hope, not only for politicians but more importantly for common people. If you look at the direction of the market from 2011 to 2013, it was no-where. The market was looking for change. The election year is the hope for a change. The same hope energized the market as well and it delivered 25% returns during the period. Now what next!!! It has been almost 11 months when the Modi government came to the power in May 2014. The market waits for 12-15 months’ after a new government is formed. If it finds that the government is not delivering then it starts its downhill journey. We are now at that point where the 12 months is about to get over. This is an important tipping point. So the pertinent question is - what next? Let’s understand how the government has fared so far? Let’s start on the positive notes where it has done well: - Transparent auctions in telecom and mining sectors - Launch of some innovative schemes and ideas o Jan-Dhan Yojana, a financial inclusion program. A great move to connect the person on the bottom of the pyramid with the main stream o Make In India. The most important part is cut down in processes to start a business o Swachh Bharat Abhiyan. Another great move to make people at least aware about cleanliness. This initiative alone could help us in significantly bringing down household health bill - A boost for defence-related manufacturing in India and insurance sector FDI limit - Business first and politics second: Continuation of Aadhaar is a classic example - Displayed a firm stand on various fronts both domestic and international - Visible actions on corruption cases at high places On top of it, the government is blessed with the reduction in crude prices. This has helped it take a bold step of deregulating diesel pricing. While the government has taken several good steps and the hope is not yet shattered, a clear picture on economic reforms is yet to take shape. So let’s now consider where it needs to improve upon: - The speed of work on the ground is yet to be seen like awarding infrastructure projects - Path breaking reforms are missing: GST implementation, public sector reforms, PS Banks reforms, Land acquisition bill - Avoid confrontational politics. The government is doing that but it needs to be more careful - Nothing much has been done to reduce the subsidy bills/the CAD. Whatever has come down is more due to external circumstances than our efforts. - Should avoid unnecessary political controversies and control its foot in mouth politicians. Where it is heading? This year the market has gone up almost 35%. This also results in short term gains for many traders and investors. If they have any short term losses to square off then they use this opportunity during the end of the financial year. Not surprisingly, the markets came down in the month of March. However, the market bounced back in last 3 days. The short did not survive for long time. It is this kind of strength that is pulling Indian market to newer highs. If people believe that the market is at a high risk zone then they may like to see the PE, Price to Book and Market Cap to GDP ratios during previous highs and compare it with the current one. I have covered all these points in one of the articles that I wrote in November 2014 on my blog. The Sensex was trading at around 28400 and it is still around the same levels. We have room to run and remember this run is a marathon and not a sprint. We are all set here for golden years ahead if the government takes even baby steps in the right direction. If it misses big time on the reforms then we may have trouble. Till then let’s enjoy the party. About the author: Niteen S Dharmawat is an MBA and cleared CFA Level 2, CFA Institute USA. He also conducts free investor education sessions, writes blogs. A firm believer in long-term financial planning, and a 20 years veteran of the stock market, he likes to study the economy, and individual stocks. He also conducts free investor education sessions for common investors. Niteen blogs at http://dharmawat.blogspot.in/ and can be reached at niteen.dharmawat@gmail.com

 

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