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Jury Still Out on Intent

Day one was big. But the near-term follow-up is crucial

After election results were announced on Saturday, Monday was the first working day. And what a day it was, with all the action happening in a blur, which was over before anyone even got the chance to blink. The way markets opened was extraordinary. It was barely open for 2-3 seconds and within that time it was able to break a 25-year-old record for the biggest opening.

Barely 800 stocks in BSE were traded and just 202 for NSE. But that did not stop the Sensex from jumping over 2,110.79 points.

In a note to investors ICICI Prudential AMC conveyed that they are hoping there will be an unleashing of reforms like the one in 1991, which will positively change the trajectory of growth remarkably.

The 3 most important market players i.e. FII’s, insurance companies and mutual funds are expected to deploy their surplus funds in the market to take advantage of the current gung-ho scenario. To add to the positives, expectations are for  retail investors, who were left out of the recent rally, driven by positive sentiments to return to the markets.

Valuation wise India is at a premium to Asian peer group. MSCI India (15.5x 2010) as per Citi report is at the higher end of valuation except may be Taiwan (18x 2010). Considering this, it expects volatility or consolidation in the future, according to the AMC.

All the euphoria may have driven up the market on day one. But certain decisive tasks, like the fiscal deficit scenario, still need to be addressed. The AMC is of the belief that if the government effectively tackles the fiscal deficit by encouraging Foreign Direct Investment, divestment, improving government spending and taking a pro-growth monetary policy stance on a low interest rate regime etc, growth momentum will continue.

However, we might all be jumping the gun, reforms cannot be implemented overnight and will take time to implement. The indicator for the future will be the upcoming budget. The AMC is of the view that on the supply side we will witness a trend reversal. With 18 months of no significant money being raised by corporate India, from June onwards we would see a host of qualified institutional placements and rights issues. As supply pressure slowly increases, there will be stress on prices, leading to some more consolidation in the market.

In the long run markets have no choice but to reflect the underlying fundamentals. Therefore all things considered, this euphoria will continue for a few days after which the valuations, supply pressures and time taken to roll out reforms will consolidate the market.