Markets to stay range-bound for now after Lok Sabha election verdict

Representative image
Despite the correction on Thursday post the poll verdict, the momentum built up during the week, as well as the strong finish on Friday, helped the broader markets end with gains of just under 4 per cent. With the Sensex near its high of 40,000, valuations have moved up 18 times to FY20 earnings estimates. At these levels, valuations are far from comfortable and with uncertainty over 2019’s key event over, the focus will revert to fundamentals.

In fact, pessimism around corporate earnings has intensified post the March quarter results. Anand Radhakrishnan, CIO, Franklin Equity-India, Franklin Templeton Asset Management (India) says that with limited earnings surprise and tepid corporate commentary for the year ahead, earnings growth and valuations will guide the market trajectory from hereon. “We need more broad-based earnings growth for which a broader recovery is important,” he points out.

Hope for a recovery largely hinge on what sort of stimulus package the prime minister in his second term will offer for all. Experts point out that the need of the hour will be to boost consumption, especially in rural markets and infrastructure spends. “We are now witnessing a big improvement in mergers and acquisitions activity and this could well be the precursor to a more robust investment rate,” say analysts at Morgan Stanley. Those at UBS Securities add that policy choices to revive near-term growth vis-à-vis ensuring macro stability will matter for the earnings growth cycle.

Policy impetus is anticipated in pockets such as affordable housing schemes in rural and urban areas, agricultural reforms and power transmission and the distribution sector. While this should take care of revival in the infrastructure space, bringing back the consumer sentiment hinges on how fast the country’s non-banking financial companies get back to health -- a factor particularly important to revive demand for automobiles and bring back liquidity for traders in the consumer discretionary space.

Unless these measures trickle down quickly into India Inc’s financials, the markets may be positioned unfavourably in terms of reward-risk balance, say analysts at Kotak Institutional Equities. The next major event to monitor will be the Union Budget, likely to be rolled out in a few weeks. That will indicate if the new government can deliver the goods for the market.