Analysis: Cusp of a bull run or a fragile recovery?

We currently are in the "hope period", the result of which we would be aware of in the month of May. It is always hazardous to determine the course of an Indian election.

By Vaibhav R. Sanghavi

Indian equity markets are at a very interesting stage. On one hand there is hope of a stable Government in the upcoming general elections and at the same time we are yet to see a meaningful recovery in the underlying economy. Also, adding to the complication is the volatile state of global markets. Let me take both these factors in little detail.

Starting with the global perspective, there is huge pressure on the emerging markets led by China. The economy is slowing and is witnessing problems with shadow banking. It is one of the biggest causes of worry among the global investors. At the same time US Fed is continuing with the tapering programme and has revised the guidance of a tentative rate increase much ahead of expectations. This is a red flag, which investors have to be aware of. Once the rate hike cycle starts we will see unwinding of carry trades along with the liquidity being sucked out towards US. Also, if the developed markets are recovering faster, we will continue to see macro trade of DM (Developed markets) vs EM (Emerging markets). It would be complex and not going to be easy to determine the flows amidst turbulence. India is relatively better off when compared to other BRIC (Brazil, Russia, India and China) nations. Also it has acted well in terms of policy decisions in last 6 months post the mid 2013 shake off, which can help it to outperform relatively.

On the domestic front, Investors are hoping for a stable and a strong Government in the upcoming elections. We currently are in the "hope period", the result of which we would be aware of in the month of May. It is always hazardous to determine the course of an Indian election. So logically it is difficult to take a big bet ahead of the results. What this "hope period" would do is, it will keep markets relatively buoyant, even if there are no signs of economic recovery.

It is a very confusing period …. and investors would be in a dilemma regarding, whether is this a cusp of a bull run or is it just a fragile recovery. My view is, on a longer term, we are on the cusp of a bull run!! Barring the shorter term uncertainty which can be very testing, it would be ideal and a safer time to take a plunge post elections. As a hedge fund, I would be wary of taking a big directional plunge ahead of the election. It is a momentum market so might as well trade quickly, till we are sure of a sustained direction, which might be coming soon.