The stock market has been on a bull run in the hope of a stable government emerging post elections and led by Narendra Modi. Mid-way through the poll process, the question is will the surge sustain. Foreign institutional investors, which have spearheaded the rally pumping in close to $5 billion so far this calendar year, are generally optimistic though some advice caution.

UBS analysts Gautam Chhaochharia and Sanjena Dadawala feel that a positive election outcome “may not yet” be priced in. According to them, Nifty at 6,900 would be a possibility if the market starts believing in a positive election outcome — that is, the formation of a Modi-led BJP Government.

For Macquarie, there is more upside potential in the NSE Nifty, which is already up 13 per cent since the beginning of February. It sees the market going up a further 7-20 per cent depending on the strength of the new coalition Government. The market has underperformed so consistently in the last five years that despite the big run-up, it is trading at a 5 per cent discount to the 17-year average price-earning (PE) ratio of 14.5. In 2009, the election of a ‘strong’ government saw the market multiple (PE) jump to 17, Macquarie observed.

Echoing this, Bank of America-Merrill Lynch said, “Though the market is likely discounting a stable government, we expect the market to rally by another 5-10 per cent from current levels by the year-end depending on how stable the government actually is.” Improving macroeconomic indicators (falling current account deficit and inflation, and analyst upgrades) will also support the market, the bank stated.

According to Jyotivardhan Jaipuria, analyst with BofA-ML, “The initial rally in the market will be led by a re-rating. GDP growth should follow with the investment cycle recovery taking 18-24 months.”

Taking a contrarian view, Morgan Stanley, in a research report, states that the equity market is pricing in a decisive election outcome and the beginning of a new growth cycle in its aftermath. Morgan Stanley, which remains equal weight on India, added: “We think the incoming government will have to de-anchor inflation, raise capital productivity, improve the investment climate and de-lever private balance sheets to engineer a new growth cycle.”

With similar views, StanChart, in a report, said the market is likely to react positively if a stable government is elected, but it might already be partly pricing in a positive outcome based on opinion polls.

Cautious stance There are other cautious voices too. Says HSBC, “While the outcome of the general elections may be important for growth, we think it is less so for India’s sovereign credit profile. The stance of the RBI is the key factor. In the absence of economic reforms, we think India’s long-term growth rate will be constrained. So as long as the central bank accepts this and continues to keep an eye on inflation, India’s credit profile will, in our view, remain stable.”

But JP Morgan warned that the market runs the risk of getting ahead of itself and falling a victim of its own ever-growing expectations.

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