Monday, February 26, 2024
HomestocksAre Indian shares getting ahead of themselves?

Are Indian shares getting ahead of themselves?

Indian shares have rallied to record highs on hopes upcoming elections will spur reforms, but the optimism may be misplaced.

The lead up to elections – and sometimes an aftermath with decisive results – has spurred solid rallies before, Deutsche Bank said in a note.

(Read more: Why a new government may not boost India's reform prospects)

"These rallies have almost inevitably fizzled though as the reality of running a large, complex, and noisy democracy set in," it said. "We just don't think an election can be as big a game-changer as the markets want to believe presently," it added.

Surveys suggest that the ruling Congress Party, led by the prominent Nehru-Gandhi political dynasty since India's independence from Britain, will be unseated by a coalition led by the Bhartiya Janata Party (BJP) in the election, which is expected to start on April 7 and finish on May 12.

Markets clearly have an optimistic view of the election: The Sensex is up more than 4 percent so far this year, running ahead to record highs and bucking declines in many regional peers.

Valuations have also run ahead, with the MSCI India index trading at around 14.3 times 12-month forward earnings, an around 2 percent premium to its long-term average, according to data from Nomura.

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