First, the big picture. The victory fashioned by Modi in India‘s politically most important state will inevitably be seen as a thumbs up for demonetisation; the failure of the Aam Aadmi Party in expanding beyond Delhi will also reassure those who want no threat, however small, to a dominant single party at the Centre.
The BJP tsunami in Uttar Pradesh will counter any impact of feared rate increases in the United States and send markets climbing towards Mount 30k after a saffron-splashed long Holi weekend. But what can an emboldened PM Narendra Modi incrementally deliver that markets should watch for and how should investors’ position portfolios for the medium term? Three key themes should get a boost – fiscal prudence, anti-corruption and GST.
First, the big picture. The victory fashioned by Modi in India’s politically most important state will inevitably be seen as a thumbs-up for demonetisation; the failure of the Aam Aadmi Party in expanding beyond Delhi will also reassure those who want no threat, however small, to a dominant single party at the Centre. This result will give a lot of confidence to the ‘long-term’ money already invested/waiting to be invested in India as it could mean seven years of uninterrupted governance of India by the BJP.
The pace of reforms should continue, perhaps accelerate as with better strength in Rajya Sabha in 2018, the government may push forward bolder changes in sensitive areas like labour and banking. So after the initial hiccup of possible Fed rate increases, markets could look forward to renewed support from Foreign Institutional Investors (FII).
The domestic money that has overwhelmingly supported the markets and is a much more stable flow compared to its foreign counterpart will gather steam as the subtle but steady shift from physical savings (gold and real estate) to financial savings take place. The interest in mid- and small- cap spaces will be alive notwithstanding the seemingly stretched valuation.
The other political change the market will have to focus on in the near term is the nature of a Cabinet reshuffle that takes place post the government formation in the states. A more dynamic leadership in key Cabinet positions is what the markets want.
Now the three themes, starting with fiscal prudence:
In the absence of private capex revival, while targeted government capital expenditure would continue (hence selectively support capex-related companies), the political mandate would prevent runaway populism that could have derailed the fiscal math, further crowded out private capital and exerted pressure on interest rates. So directionally this is positive for financials, not blanket nevertheless as the poll promise of loan waiver could be a near-term dampener for PSU banks. We would like to focus on strong franchises like State Bank of India and ICICI Bank where valuation is supressed compared to peers on account of asset quality woes.
This is all about a crackdown on black money, a push for transparency and digitisation. The war on black money, coupled with the move to encourage financial savings, shouldn’t augur well for real estate companies catering to big-ticket housing. However, affordable housing will get a big leg-up that should salvage sectors and companies operating in cement, steel, electricals etc. While valuation comfort in this space is limited at this point, market gyrations could provide opportunity.
Finally, turning to GST (Goods & Service Tax), the four supporting bills that are lined up in the second half of Budget session should see the light of the day paving the way for GST rollout. While in the absence of the applicable effective tax rate, it wouldn’t be prudent to comment on individual companies, the themes to focus on are the followings: Shift of trade from unorganised segments to organised segments, and revamping supply chain management. Consumer companies ranging from Pidilite, Asian Paints, Century Ply, auto ancillary companies like Exide, Amara Raja that still have to deal with unorganised competition and light electrical makers like V Guard, Havells, Crompton Consumers should all benefit. Logistics players of the likes of Transport Corporation of India, Gati etc should also see much better opportunity. The other sector where there are overt gains from tax rationalisation are the multiplex companies like PVR, Inox etc. While keeping the shopping bag ready, investors should wait for market gyration to build up positions.
The question that would be crossing investors mind would be - is the timing right?
Markets never reward investors who try to 'time the market’. However, a few data points are of interest to us.
While markets had a decent run post the initial demonetisation blues with no overwhelming support of earnings, the valuations, while not undemanding, can re-rate if earnings support kicks in a few quarters down. The election verdict removes one major political uncertainty. Smart money will be watchful of all the lows to build up positions, and investors should keep the same in mind in the long marathon.