BJP's UP win won't bring 2014-like exuberance for markets: Dhananjay Sinha

The outcome of the recently concluded state elections with a strong mandate for the BJP, specially the Uttar Pradesh, has rekindled hopes of another big rally similar to the one we saw post the general elections 2014. The resounding verdict in UP is unambiguously a mandate for Mr Modi. The Modi trade, post the landslide victory of the BJP in 2014, catapulted Nifty index to a new high of 9000, translating into a gain of 50%. Bigger gains, however, were seen in mid-and small-caps, where resurgence of retail participation saw indices rising by over 150%. The question is whether the market can respond to the UP election with similar fervor. The answer lie in understanding the factors behind the earlier rally since 2014 rally. Firstly, the backdrop of the post 2014 election rally was a period of uncertainty on both domestic and global fronts. Domestic outlook was clouded by macro vulnerabilities arising from high inflation,  slowing growth and political instability. Nifty Trading Tips

 
Globally, uncertainty arising from ending of US quantitative easing weighed on market sentiment. So the adverse backdrop created a strong case for a sentiment revival, specially with The US Fed dithering from rate normalisation for a long time. Decline global crude prices also bolstered the perceived benefit for India fundamentals. The current backdrop is considerably different. The expected gains in earning for Indian equities has belied with EPS for benchmark indices remaining unchanged for nearly three years, with select sectors rebalancing declines in others. This has contributed to the fact that average earnings growth for NIFTY has been just 4.5% since FY08. Also the popular Modi trade which captured hopes of revival in investment cycle and other domestic deep cyclical sectors have not panned out as expected.The key issue is whether the earnings trajectory will be better going forward or not, and whether the trading PE multiple of 23x is already pricing in a better outlook. My sense is that a significant re-rating is unlikely even as I believe that a reflationary fiscal outlook and normalisation of demonetisation shock will yield better demand outlook. This will likely generate better earnings performance of around 10% compare to the stagnancy we saw over the past three years. It will also be lower than usual optimistic consensus projection of 15-20% that we have seen over that past 7-8 years. Future & Option Trading Tips