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Little to Cheer For

Markets will see an immature rally, then a sell-off

The Great Indian Electorate actually BEHAVED. One, they actually went out and voted. Two, they decimated a lot of people: old guards who had got so entrenched and arrogant, that they took us poor Indians for granted.

In Bengal and then Kerala, they left the Left, soundly dumped in favour of just anybody (else) they could find; even Mamata was better, they felt. In the BIMARU states, they broke old power structures. The Muslims have gone back to the Congress, deserting their discredited and corrupt alternates. Why pay Rs 20,000 crore to these middlemen, who will anyway sell their support to the Congress? Might as well go direct to the Congress; reduces the velocity of money, but increases the savings rate.

The BJP lost Rajasthan, the one state they thought they would not. All in all, you actually saw intelligence everywhere, as if the great Indian electorate had really turned great.

India really is one of the few countries with some latent economic demand, household debt capacity and a supply shortage. With $8 trillion available and looking for somewhere to go, this is one of the countries that beckons. FDI, portfolio flows and even overseas lending will increase, as expectations of a Narasimha Rao-like courage on reforms will surface.

This time, there is nobody to hold up reforms (except perhaps Mamata, who can be mollified by sacking the CPM Govt in Bengal on some pretext or the other).

Expect action in power (i.e. electricity generation), alternate energy, rolling back subsidies in various areas, some aggressive stimulus packages. Liberation in Insurance, banking and markets. A sharp focus on infrastructural investments. Expect core industry to get a bailout package.

In the short run, the market will see an immature rally, a selloff and then a minor trough. Not much upside though, unless there is a huge inflow from abroad. That should take some time in materialising. Mostly, I would bet on a range-bound movement, about 20 per cent plus or minus. But a reallocation from the old favourites: real estate will not come back so soon.

Rupee will definitely see some strength, only partly because of generic dollar weakness. Unfortunately, almost all the trends I have mentioned are already in place, so you will just see an acceleration followed by some profit-booking. So don't do anything new, if you haven't already bought into these trends.

Yes, the oversold stock-specific stories will not see their earlier bottoms again, so look for specific stocks that have been beaten down excessively. Just halve your earlier P-E target, just to be safe (the risk premium on Equity Capital has doubled). Target a Market P-E of 15-17, and holding cash should not be as difficult as in 2007. Nobody is getting rich any more…