Indian markets are ‘priced to perfection’, and there is not much upside ahead of the elections

The Nifty and Sensex hit highs of 22,081.95 and 73,000, respectively, during the Asian trading session on Monday afternoon.

The country is scheduled to hold its general elections between April and May.

“BJP’s win is already priced in at this point. There were many question marks over the party’s win before the state elections, but a lot of that has gone away,” said Piyush Mittal, portfolio manager at Mathews Asia.

Stock markets have factored in “a lot of positives” and investors may only see a single-digit return of 3% to 5% before the election begins, Mittal told CNBC in a phone interview.

In the past five general elections, Indian markets have risen an average of 18% six months before, 8% three months before, 2% in the months after the results, and 10% half a year later, said Shantanu Bhargava, MD and President. From investments listed at Waterfield Advisors.

“If you compare it to the historical average, you will find that a lot of the returns have already been discounted… and the current government’s victory has already been discounted in the market,” he said, adding that the markets were “priced at a reasonable price.” “Perfect perfection.”

So, when can investors see another big rally in Indian markets?

Analysts believe this will only happen when the Reserve Bank of India cuts interest rates, which is likely in the second half of the year.

“If (the Reserve Bank of India) thinks inflation will fall permanently, we may see some action in the second half of this calendar year, but it also depends entirely on the path of consumer price inflation in India,” said Waterfield Advisors. Bhargava said.

The South Asian country’s inflation rate reached 5.5% in November, and a Reuters poll expects it to reach 5.7% in December, which is still higher than the central bank’s target of 4%.

Mittal noted that a “harder rally” could happen if interest rate talk becomes more “benign” and there are rate cuts from the US Federal Reserve and the Reserve Bank of India.

Confidence in the economy will also boost investments in the country.

India’s largest automaker, Maruti Suzuki, announced on Wednesday that it will invest $4.2 billion to build a second factory in the country. Vietnamese electric car maker VinFast said earlier this week that it aims to spend about $2 billion to set up a factory in India as well.

The southern Indian state of Tamil Nadu has confirmed that Apple suppliers such as Tata Electronics and Pegatron have plans to invest more than $4.4 billion in the state, as the iPhone maker seeks to diversify its supply chain away from China.

Andrew Holland, CEO of Avendus Capital Alternate Strategies, told CNBC’s Street Signs Asia last week that he expects $100 billion in flows into India this year, especially as the country is set to be included in JP’s Emerging Markets Government Bond Index. Morgan. in June.

According to India’s National Investment Promotion and Facilitation Agency, the country received $71 billion in foreign direct investment in its last fiscal year, which ended in March 2023.

However, India still has a long way to go in its infrastructure to show the world that it can handle all the attention that comes its way.

“The poverty you see right outside a Bombay or Delhi airport prevents people from getting a very convinced bet,” said Praveen Jagwani, CEO, UTI International.

Analysts who spoke to CNBC agreed that Indian markets are currently overvalued, but there are still sectors that show promise.

“There is massive financialization of savings in the country away from physical assets and towards more financial assets,” said Matthew Asia’s Mittal.

Ramez Shilat, portfolio manager at Vontobel Asset Management, said that while “pockets of the market” are fully valued, the financials and consumer goods sectors remain undervalued and are poised to do well this year.

“The financial sector is likely to do well because it is relatively cheap, generating good growth and lagging the broader rally,” Shilat told CNBC in a Zoom interview. “And if you see consumption going up in rural markets, consumer names that have lagged somewhat could go up as well.”

Among financial companies, Shilat favors HDFC Bank, whose merger with India’s largest mortgage lender, Housing Development Finance Corporation, has increased the lender’s mortgage penetration. “It’s the cheapest it’s been for several years now,” he adds.

In the consumer space, Shilat said Eicher Motors is a name that “continues to exceed expectations” as it has a good runway both domestically and in export markets.

“They have witnessed very good growth in the festive season which indicates increasing competition in the premium two-wheeler segment.”