Strong fundamentals, stellar earnings cornerstone for stock markets to bounce, say experts

Policies to drive market comeback:  Even as the Lok Sabha election results announced on Tuesday saw a freefall of capital markets with the Sensex fall 4,389.73 points to 72,079.05 at the end of day’s trade and Nifty ended 1,379.4 points lower at 21,884.50, financial analysts have expressed cautious optimism that stock markets will witness a rebound as soon government formation takes place. 
Notably, on May 24, just six sessions prior to the vote count and on May 3, a day before the vote count, the benchmark equity indices Sensex and Nifty soared to new record highs in the trading session. 
At present with no party, including Bharatiya Janata Party (BJP), having a clear majority of its own, tough reforms like big ticket privatisation and labour law reforms may take a backseat. The available trends indicate that BJP is likely to win about 240 seats in a 543-member Lok Sabha. The saffron party will have to rely on its allies like Telugu Desam Party (TDP) and Janata Dal United (JDU) to form the next government. Can the formation of a new alliance government help the capital markets to recover? Republic Business takes a deep dive. 

Strong fundamentals 

Speaking with Republic Business, Financial Analyst Kishore Subramanian said the present market situation is similar to the scenario of the capital markets witnessed in 2004, after the then National Democratic Alliance ( NDA) government led by Bharatiya Janata Party (BJP) saw an unexpected defeat amid a meltdown in the emerging sectors of the Indian economy.  Markets had back then tanked 6 per cent in one month.  
However, the financial analyst added that key fundamentals, such as high GDP growth rate and robust earnings at the moment are intact, which is a positive sign for the markets. “This is reminiscent of the 2004 bloodbath of the markets. We had experienced a similar scenario but back then markets had corrected and we had seen the biggest rally in days to come,” said Subramaniam. “We may see another 5 per cent correction within the next one week,” added Subramaniam. As per Subramaniam, the stellar performance reported by the companies in their fourth quarter results and for the last fiscal is a cornerstone for the markets to bounce back. “Markets are a slave to company earnings and I am sure it has to bounce back,” Subramaniam further added. 

FII inflows 

After a week-long losing spree, just a day prior to the exit polls for the Lok Sabha polls, 30-share BSE Sensex had surged 164.24 points reaching 75,582. The NSE Nifty rose by 36.4 points, surpassing the 23,000 milestone historic high of 23,004.05. Reflecting on an interesting observation, Subramaniam says there is an interesting observation which market analysts noticed in the week prior to May 24. “Even a week before the exit polls, FIIs were selling big time. It has taken the market observers by surprise that did the FIIs have a sniff of the results,” said Subramaniam. As per Subramaniam, it is a knee-jerk reaction of the market which has seen many major stocks such as that of the Adani Group see a nosedive of its stocks on Tuesday. 

Notably, on May 31, just a day prior to the vote count day, markets were at a record high. The BSE companies added market capitalisation of nearly Rs 14 lakh crores on a single day on May 31. Reliance Industries was among the key winners as its shares hit a record-high market cap of above Rs 20 lakh crore.  “The present market is a dangerous one for the trader but a great opportunity for investors,” added Subramaniam. 
As the Nifty PSE index surged 8 per cent to close above 11,000 for the first time on May 3, REC, PFC led the charge, while oil and gas stocks rose. However, on Tuesday, after the leads for the Lok Sabha election results started pouring in, the  PSU stocks tanked up to 15 per cent. 
Shares of public sector enterprises and state-owned banks tumbled up to 15 per cent on Tuesday as benchmark equity indices plunged after the initial trend showed the BJP winning a lesser number of seats than predicted in exit polls. The Nifty PSU Bank Index witnessed a steep fall by dropping 839.55 points or 10.49 per cent to 7,166.60. In addition, shares of public sector lender State Bank of India (SBI) plunged 11.73 per cent to Rs 799.45 apiece.
However, Subramaiam sums up the way markets reacted on Tuesday as an “over reaction”, adding that some stocks offer an opportunity for entry. 
“During such times the market over reacts and some stocks give you an opportunity for entry,” added Subramaniam. 

GDP rate encouraging 

The more than anticipated growth rate of the country coupled with prudent taxation policies resulting in robust mop-up, and a widespread digital and financial framework along with an evolving manufacturing sector will be a cornerstone for the new government to rein in new-age reforms that can make India a developed nation by 2047. In its outlook last week, S&P Global Ratings had said that historically India has been on a high growth path with national consensus on key economic policies. "Regardless of which the new government is, the pro-growth policies, sustained infrastructure investments, the drive to reduce fiscal deficit are some of the positive aspects and produced very good outcomes and we believe this will continue in the coming years no matter who is in charge," S&P Global Ratings Analyst YeeFarn Phua said.
“The strategy to ensure Atmanirbharta, especially focusing on knowledge intensive employment generating and strategic manufacturing, will serve India well in the long run while providing scope for increasing both services and goods exports,” said the financial expert Subramaniam.