Clifton Desilva is an investment expert and a Director at Altina Securities.
Every investor needs to note that the stock markets are always ahead of times and markets always discount the future. In most cases when a government is converted into a minority the stock markets panic and markets witness a steep decline. However, this time around the opposite has happened and despite the fact that Mamta Banarjee of Trinamool Congress (TMC) threatened to withdraw support and finally withdrew support to the UPA government, the stock markets have scaled to a 14 month peak. The sharp rise in the past twop weeks is attributable to several reasons and the two most important reasons being the gush of liquidity coupled with the spate of reforms initiated by the UPA 2 government.
In fact the markets had been on a down slide for a long period of time on concerns that the present government is in a slumber mode and what was being seen was pure policy paralysis. What further damaged the sentiment was the boycott by the opposition wherein no business took place during the monsoon session of parliament. Also a number of scams further dampened the sentiment and with a high rate of inflation, high interest rate regime coupled with a slowing down of the economy, the market sentiment was negative leading the markets to an oversold position.
The sector worst hit was the banking sector, especially the public sector banks on fears of deteriorating asset quality, while the private sector banks were spared in view of their better asset quality. Along with the banking sector the infrastructure sector was also hit badly.
However, post closure of monsoon session of Parliament, the government initiated a spate of reforms which were even beyond the imagination of the most diehard optimists and apart from all these reforms being bunched together the government has promised more reforms in the next month.
The Finance Minister has gone on record to state that the cut in the cash reserve ratio (CRR) by the RBI is a small and welcome step and bigger things are in store. He exuded confidence that the RBI would announce far bigger steps to boost growth in the next policy review on October 30 and the government too would announce more policy steps in the next 45 days.
On Thursday all the five notifications on the recent FDI decisions were issued; There was no move towards partial withdrawal of fuel price hikes; Next on the agenda are reforms in power sector and a hike in the FDI cap in insurance ;Finance Ministry, Vodafone appeared to be smoking peace on tax issue and the Kelkar Panel Report on fiscal consolidation may be uploaded soon.
There are indications that the cabinet is likely to approve the amended pension and insurance bills among other things in its meeting on Monday. However, voting these bills into law will still remain uncertain given the opposition from the TMC and the Left parties.
The spate of unexpected reforms and that too being bunched together coupled with strong global inflows as well as rising global stock markets have all together resulted in the Indian stock markets witnessing a sharp rise. The Senesx which was at 17,346.27 a fortnight ago has jumped to 18,752.83 on 21st September, a gain of 8.10%, while the Nifty has moved up from 5238.84 to 5691.15 during the same period and registering a gain of 8.63%.
Apart from frenzied buying there has been a lot of short covering especially in the public sector banks and infra and capital goods stocks.
With more reforms in the pipeline the mood of the markets should remain buoyant and stocks of large cap are always preferred in view of their visibility of earnings as good corporate governance. However since the run up has been steep in a short period of time, there are possibilities of a short term correction taking place going forward. In these corrections stocks of large caps can be acquired for long term gains. Once the market stabilizes and the direction of the market becomes clear then there would be a lot of well managed mid cap stocks which now appear cheap and can be acquired for substantial gains both short term and long term.