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Sensex Rally Driven by PE Expansion in Modi's First Term
May 27, 2019

The chart of the day shows the change in the Sensex price to earnings (PE) multiple over the last five years of Modi government.

You can see that, overall, the Sensex PE ratio has been in expansion mode over the last five years. Between the election results of 2014 and 2019, the Sensex PE expanded by 52%.

What this means is that most of the gains in Modi's first term have come mostly from an expansion of valuation multiples and only partially due to earnings growth.

What are the implications for investors in Modi's second term?

In my view, what worked in Modi's first term may not necessarily work in the second one. Back in 2014, you could have put your finger on a random set of stocks, and there were good chances you would make money.

But right now, the circumstances are quite different. The overall markets are trading at elevated valuation multiples. The economy has been showing signs of fatigue. The financial sector is still in a mess. Unemployment levels are high.

For much of Modi's first term, the global markets were in a bull run. However, global economic conditions are not as favourable now. There are growing fears of an impending global slowdown. There has been an escalation in the US-China trade war.

Given all these factors, do not expect the markets to have a broad-based bull run in Modi's second term.

Also, it's clear that the next major bully rally will have to be supported by solid earnings growth and revival in the economy.

With the elections done, the markets will now move based on earnings visibility, economic policies, global sentiments, and so on.

So, be very selective about the stocks you pick for your portfolio.

Make staggered investments and take advantage of market corrections.

And stay invested for the long run.

Where do you expect the Sensex to be at the end of the second Modi term in May 2024? What, according to you, will be the key to making winning investments in the second Modi term?

In my premium daily newsletter Insider, besides cherry-picking the best investing ideas, I have been regularly sharing insights about the top global and domestic factors affecting the stock markets and guiding my readers to invest smartly.

You can sign up for Insider

Data Source: Ace Equity

This Chart Of The Day was published in The 5 Minute WrapUp - The Secret to Picking Winning Stocks in Modi's Second Term

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