Here we go again

Stocks are surging on Modi fever. Is there disappointment in store?

The past two parliamentary election results threw up some great surprises. In 2004, the consensus was that the BJP led-NDA would regain power but the stock market was thoroughly disappointed at the outcome, pushing the benchmark index down through two circuit-breakers. Again, in 2009, the Congress-led UPA decisively regaining power came as a surprise, albeit a pleasant one, with the Sensex hitting the upper circuit. This time, once again, there is near unanimity that a Narendra Modi-led government will come to power — investors are already counting their chickens as seen in the pre-election rally. But as history tells us, if you are indulging in stocks, you can ignore the seemingly improbable outcomes only at your own peril. 

Unless you are a trader punting on the election outcome with futures and options, it may be a good idea to remind yourself that stocks ultimately appreciate based on earnings growth that companies generate. The only way you can sustainably make money is by buying them reasonably cheap and waiting till the stock is re-rated to reflect its true worth. While the external environment is an important growth trigger, India has never been a secular macro story, where you could have blindly made money by buying the benchmark index. Even when the index was stagnant for long periods of time, investors made money by picking the right stocks. 

Given that the rally assumes a sure-shot outcome, it makes even more sense to tread with caution. Seasoned investors UR Bhat and Chaitanya Dalmia share their views on how the market could move from hereon. The best approach will be to squirrel away some cash to deploy in case an unpleasant surprise strikes. In the aftermath of elections, presuming a clear picture does not emerge, political negotiations and manoeuvring will make stocks go down more than up. 

In other stories, associate editor Kripa Mahalingam analyses Sun Pharma’s Ranbaxy acquisition. The $4 billion all-stock deal values Ranbaxy at much less than what Daiichi Sankyo paid for it nearly six years ago. Sun does have a great track record with acquisitions, having closed some 16 deals in 16 years till 2012. Will it shine through again? That story starts here.