The analyst in me suggests that election driven equity rally is more sentiment driven than fundamental driven. The pragmatic in me suggest that the Sensex and Nifty could well trend much higher from current record high levels given the election fever in market. Right now I would go with a pragmatic approach and be long equities at all levels of the Sensex and Nifty until there is some sense of sanity emerging in markets.
The sanity would emerge only after the new government presents the budget for this fiscal year, which is expected at end June or early July 2014.
The opinion polls are taking the Sensex and Nifty to record highs with the indices closing at all time highs of 22700 and 6799 as of 9th April 2014. The election results are more than a month away on the 16th of May and markets are already factoring in a boom period of domestic equities.
Modi led NDA is widely expected to from the government at the centre post 16th May. Sensex and Nifty are up by 7.4% and 7.9% calendar year 2014 to date and could well trend much higher going into 16th May and post that date as well.
It could well be a case of the equity bull market just starting off all over again. To be sure, the Sensex and Nifty have hardly performed since peaks seen in end 2007/ early 2008 and has just about returned around 5% on an absolute basis over a 6 year period. In fact bonds have outperformed equities by at least 6% CAGR over the last six years.
The domestic investor is hugely under owned equities given its weak six year performance. FII’s have largely driven up equity markets with purchases of USD 4 billion over the last three months. The domestic investor has a lot of catch up to do on equities given the under exposure.
The markets usually front run end investors and given the expected election result, the market will take up equities to ultimately sell it to domestic investors and FIIs who increase weight on Indian equities given its performance. Usually investors chase past performance and this will look good as the market rallies further.
It is difficult to say at what levels the Sensex and Nifty will cool down. Hence waiting for cooling off levels could mean missing out on more upsides. If you do want to invest now, do not wait for index levels. If you book profits, reinvest the profits and do not stay in cash as you may find that you will be deploying the cash at higher levels of equities.