Bombay Stock Exchange in Mumbai (BSE)
A bronze bull statue at the entrance to the Bombay Stock Exchange in Mumbai. Image Credit: Bloomberg

Dubai: Going by the Indian stock markets, Prime Minister Modi is set to score a win on May 23.

“Rich market multiples suggest that markets are expecting a Modi win, which is likely to prompt a move towards our upside scenario of 11,800 for the Nifty,” said Gautam Chhaochharia, Head of India Research at UBS. “Any disappointment at the outcome of the elections, however, could lead to a sell-off.”

The Nifty index traded at 11,170.50 on Thursday.

The stock market has gained nearly 3 per cent since January 1 and surged 6 per cent in the last year. And this rally has been fuelled by foreign fund inflows than domestic. Foreign institutions have invested $9.7 billion in the year so far compared to an outflow of $4.5 billion last year. Domestic institutions, which were big bulls last year with an inflow of $16 billion, have been net sellers and reduced their exposure by $2.4 billion.

What of likely sentiments once the results come in and a new government steps in? “Post the initial euphoric reaction to the actual election outcome, market focus will subsequently shift towards economic fundamentals, policies, corporate earnings, etc and here we see some optimism from a medium term perspective,” Nitin Jain, principal fund manager at Kotak Mahindra (UK).

But new investors should be cautious. “Today, the risk-reward scenario is very unattractive,” said Chhaochharia. “The scope for fiscal slippage and/or a negative growth surprise, along with the possibility of an underwhelming reform agenda, has the potential to weigh upon markets post elections.

“The headline earnings recovery from the outcome of the election has already been priced in, leaving little room for upside. We recommend investors to avoid being overly aggressive today, wait for a correction, and enter the market at better valuations.”

There might be opportunities in medium-cap stocks, which has lagged in terms of performance.

“Mid-cap stocks are trading at reasonable valuations,” said Jain. “While we have seen a sharp move up in recent weeks, we will potentially have some more upside from potential PE multiple expansion of the mid-market segment over the next few quarters.”

The BSE mid-cap index has shed 12 per cent in the past one year compared to a 6 per cent gain in large-cap stocks.