Opinion | India’s longest bull market gets longer still

Stock market investors appear relieved by renewed prospects of a stable government after Balakot. A revival of corporate earnings, however, is still an open question

"I am prepared for the worst, but hope for the best," said Benjamin Disraeli, a 19th century prime minister of the UK.

For most of the time over these past few years, Indian equity markets have behaved as if the first part of Disraeli’s advice was irrelevant. They have withstood many a storm just by hoping for the best. A rare departure was when tensions between India and Pakistan escalated last month, which came close on the heels of opinion polls that pointed towards a possible hung verdict in this year’s general election.

With uncertainty in the mix, the mood had turned somewhat sombre. Though other emerging markets rallied, celebrating the increasingly dovish stance of the US Federal Reserve, Indian markets held back. In January and February this year, the MSCI India index underperformed the MSCI Emerging Markets index by as much as 10%.

However, as is often said, hope springs eternal in March. Now that the risk of a confrontation between the two nuclear-armed neighbours spiralling out of control has reduced considerably, Indian markets are back to their outperforming ways. Moreover, the markets appear to believe that the chance of the National Democratic Alliance (NDA) retaining power has risen, with the recent air strikes on Pakistan territory expected to swing public sentiment in favour of the BJP-led ruling alliance.

Of course, issues such as farm distress and unemployment haven’t disappeared, so it is still unclear how various factors will eventually play out at the hustings. As far as stock markets go, from what is visible now, there is enough evidence to suggest a return to the record rally that has made India a favourite among its emerging market peers.

According to Morgan Stanley’s definition, the current bull market has entered its second decade, making it the longest rally ever in the history of shares being traded publicly in India.

For investors, that is not unalloyed good news. The ongoing rally has also generated rather poor returns in comparison with previous bull phases. Corporate earnings growth has been far lower than in other periods when market indices have been on a sustained incline. Some of the structural challenges that a few industries, such as automobiles, face are unlikely to disappear just because a stable government assumes office this May.

As the performance of companies remains the primary driver of equity prices, investors should focus their energies on finding stocks that are likely to see a recovery in earnings, rather than spend much time predicting what combination of political parties will form the next government. The banking industry, for example, has just begun to exhibit signs of revival at the fag end of the current government’s term.

As for other sectors, most companies that have struggled to perform in the past few years will not suddenly achieve better numbers after the polls, regardless of who wins. Over a slightly longer time-frame, the key indicators to watch would be an uptick in rural incomes, employment and public capital expenditure. As things stand, some economists expect the Indian economy’s expansion to lose some pace in the next fiscal, given those weaknesses. If the new government addresses them effectively, it would be something Indian markets can truly celebrate.