Flows, ‘Sentiments’ and ‘Fundamentals’ drive the market. FII flows which were negative for CY 2018 have increased significantly from Jan 31st, 2019. Dramatic increase in FII flows was evident from the contra indicator provided by The Economist. It carried an article titled “Why foreign investors are losing interest in India” on 22nd December, 2018. It was a question of few weeks for FII flows to turn around. Inflows in Mutual Funds started slowing in the second half of FY19 despite steady SIP flows. From a flow point of view, FIIs will continue to be a buyer ahead of election. Hopefully, Mutual Funds will see acceleration in flows postelection. Market should remain well bid in absence of large scale issuance of paper ahead of election.
Market Sentiment in the near term will be influenced by election outcome. Market couldn’t predict actual election outcome in 2004 as well as in 2009. It got lucky in 2014. Election results matter a lot on the day of the result. In 2004 as well as in 2009, unexpected outcome resulted in significant movement in market. Today, market is pricing in a reformoriented stable government pivoting around one National party. There will be material move on the day of the election result, if the actual result is different. Post-election market will be driven by Fundamentals. In 2004, market corrected by more than 15 % on the result day, but thereafter rallied on stronger growth. In 2009, market went up by 20 % on the result day, but thereafter remained subdued due to tepid growth. In 2014, market moved-up in anticipation of stable government well ahead of the election. Post-election market performed moderately in nominal terms, but better in real term. In May 2019, unexpected election result will have material impact on the market like in 2004 and 2009, but thereafter Fundamentals will take over.
From a Fundamental view point, FY20 earnings growth could jump due to corporate focussed Banks, generic Pharma companies and companies having presence in Europe. Telecom sector could be a surprise, if telecom war comes to an end.
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