While some infrastructure firms may gain, valuing all of them at higher multiples is naive
The solution to some of the country’s problems would need some tough reforms
Short-term traders predict where the crowds will eventually go. On Monday, after exit polls suggested that the National Democratic Alliance (NDA) government will return with a clear majority, traders appear to have bet the house on the assumption that investors will turn to Indian equities. However, many other indicators suggest this might be a dangerous leap of faith.
The exit poll results suggest that the overhang of uncertainty about the election outcome is more or less gone. Investors who like continuity in policy need not worry about a new government taking time to assess the macroeconomic situation, before tackling the problems the country faces. It is for these reasons that the investor sentiment in the country is understandably positive.
However, the fact also remains that many of the current economic challenges have occurred under the NDA government’s watch. To expect a quick resolution, then, will be naive. “The solution to some of the country’s problems would need some tough reforms such as changes in labour laws, land acquisition laws, and privatisation. Unless some of these tough measures are taken in the next few months, investors will need to do a reality check," said the head of research at an institutional brokerage on condition of anonymity.
“The Modi-led Bharatiya Janata Party (BJP) government has had its failures in manufacturing in India outside of defence, building of ‘Smart Cities’ to take the load off Tier-I cities and distribute wealth, and on incentives for private sector recovery. We do not see these reviving even in case of a favourable election outcome," Jefferies India Pvt. Ltd said in a note to clients. Domestic defence companies, alongside some road construction firms and renewable energy companies have gained, but to value all infrastructure firms at higher multiples, like euphoric traders have done, is clearly taking things too far.
Besides, there is the worry about high valuations and poor earnings growth. “Indian market valuations are not cheap despite the muted performance of the broad market. We would note that a significant portion of the correction in large-cap stocks is because of earnings downgrades rather than a correction in valuation multiples," analysts at Kotak Institutional Equities said in a note to clients.
An important point to note about Monday’s rally is that institutional investors weren’t all that gung-ho. Institutional buying of less than $200 million on a day the markets rose nearly 4% shows that the rally was driven by other forces.
“The markets have risen 6% in the past three trading sessions, besides which valuations are higher than five years ago. It’s hard to see how markets will rally much more even if the final election results are to the markets’ liking," said Vetri Subramaniam, group president and head of equity at UTI Asset Management Co. Ltd.