By Ven Ram, Bloomberg markets live reporter and strategist
Stock markets in India have run away with the idea of voters giving the green light for further economic reform, but gains may moderate toward the end of the day.
The Sensex has run up 3% after exit polls showed a decisive majority for Prime Minister Narendra Modi’s party. The scale of the rally suggests that traders have priced in a landslide victory, but given the inconsistent nature of exit polls, some traders may be inclined to take money off the table ahead of the actual election results due on Tuesday. With the markets having priced in the best outcome, there is little room for upside surprise from here.
Elections results aside, valuations — while not overexuberant — sound a note of caution. The Sensex offers a prospective earnings yield of about 4.75%, lower than an average of 5.33% that has prevailed historically. The Nifty offers 4.85%, compared with a mean of 5.52%.
However, beyond the here and now, stocks in India are bound to fare well. Before today’s effervescent rally, the market cap of the nation’s shares was some $4.7 trillion, a number that is commensurate with the size of its economy.
Data last week showed that gross domestic product rose 7.8% in the three months through March, compared with a forecast of 7% — a margin of beat that is isn’t common in mature economies and ones that are as big as India’s. Indeed, given the frantic pace of growth, S&P Global forecasts that the domestic economy will grow from $3.5 trillion in 2022 to $7.3 trillion by 2030 to emerge as the world’s third largest.
The S&P has, meanwhile, affirmed the nation’s foreign- and local-currency debt rating to positive, opening the path toward a higher rating over the next couple of years. That, together with expected interest rate cuts from the central bank, will bring down companies’ cost of capital, boosting margins.
The rupee has rallied on the back of exit polls, but the Reserve Bank is likely to absorb excess inflows to build its reserves — meaning I don’t expect unmitigated gains. The currency’s stability, however, augurs well for foreign investors repatriating money, adding another reason to be bullish on the nation’s stocks over the longer term.
