Regardless of whether markets rose or fell, one set of stocks simply kept rising. And, another set of stocks, which encompassed the broader market simply kept falling. This trend finally seems set to break. When we have extreme overvaluation in one part of the market and significant undervaluation in the broader market, convergence is a necessity.
But, markets can take longer than usual to revert to mean. We are probably still in a phase of uncertainty. In the past, valuations of weaker stocks further lost value even when the index stabilised. For markets to attain broader stability and to further rise, we need strong messaging from both the government and Foreign investors. This process should lead to divestment of companies, rising global interest in India and better economic performance. While economic performance can still improve with a lag and markets will discount it ahead, the same can’t be said of government intentions in reforms. Markets want to see the government act decisively and sustain its pace of reforms.
The coming weeks are crucial for both government and markets as key stakeholders judge the sincerity of intent and the scope for faster reforms. Once this phase passes over with positive outcomes, we can see better markets.