The markets have hit a new normal. Political capital is no more a worry for the Government. Now, the Modi government can be emboldened to hasten reforms, implement GST, come down strongly on tax evaders and clean up the system. But, this sequence will still need time to show good results. Nothing is going to change on the ground for the next few quarters. All we have is better visibility on the economic runway. Better visibility generally improves sentiment significantly. The markets would be happy to live comfortably with higher valuations. Visibility gives that comfort to global investors. But, there is a distinct flipside too. The government will be hard pressed to give excuses. The sham of not running parliament will no more be acceptable.
With a brute majority in both houses, the government will be forced to push through legislations it has not been in favour of. Political reform will now become a compulsion on this government. This is rather unusual and unseen. The markets may not be overly enthused to run ahead right now. Even, if it does get too excited, there is enough supply of paper from IPO’s, FPO’s, disinvestment by government and selling by LIC to feed the market’s demand. We are headed to a phase where liquidity continues to remain the primary market driver. Fundamentals will take a long while to take over from liquidity as a primary driver of markets. Investors must understand that the markets will be able to blow out only when fundamentals become the primary driver and liquidity remains strong. Fundamentals and liquidity will then come together to create a sustainable bull run. That is still some distance away.
“Value investing is risk aversion.” – Seth Klarman
