Business and economic cycles are strongly influenced by a country's political genealogy, says PhillipCapital. Though some critics argue that the government has achieved little, the brokerage house finds the mechanics of the government functioning to be sound.
India's business as well as economic cycles turned on sentiment (positive) though some critics argue that the government has achieved little, but PhillipCapital finds the mechanics of the government functioning to be sound.
The brokerage house, in a research report, says big bang reforms while awaited, the long-term growth prospects are set to improve as the focus of the government is capacity creation and improving the system efficiency with a spate of policies and reforms. Significant rise in government capital expenditure, lower inflation and trending down of interest rates are the most palpable outcomes over the near-to-medium term, says PhillipCap.
The brokerage house is introducing 'PhillipCapital Model Portfolio' based on the themes of the uptick in government capital spending, lower interest rates, strong dollar and pick up consumer discretionary spending with focus on value and mid-cap stocks. It is overweight on financials, autos, early cyclicals, pharmaceuticals and underweight on late cyclicals, tobacco and oil and gas.
According to the PhillipCapital Model Portfolio, FY16 will be marked by high degree of volatility and slowing foreign investments. However, valuations are likely to sustain with decreased cost of capital and improvement in earnings visibility,
Its top picks for the year are SBI, Axis Bank, Bank of Baroda, Coal India, Canara Bank, UltraTech, NCC, Biocon, Tech Mahindra, Dish TV, Maruti, Tata Communications, Kaveri Seeds, Trent and Asian Paints.
Excerpts from the report:
Onset of capacity creation after long phase of distribution: Many economists feel that UPA1's success was borne out of the policies of NDA1, which set capacity creation cycle in motion with public capital spending averaging at 28 percent of GDP, much higher than UPA1 at 23 percent, the adds says.
The cycle was augmented strongly by private investments in UPA1, leading the much-touted investment cycle of 2004-2008 and the key factor of UPA1's success. The FY16 Budget with 26 percent yoy increase in capital expenditure is indicative of BJP's policy framework based on capacity creation. PhillipCap believes that the present government's way of functioning will be similar to NDA1 and much will be achieved in reviving the investment cycle and improving long-term growth prospects.
Structurally a phase of low inflation; cost of funding to come down: The brokerage house expects 75 basis points reduction in interest rates in FY16 as compared to consensus expectations of 25 bps. "While RBI governor Raghuram Rajan has a hawkish stance on inflation, but a closer look at historical NDA fiscal management policies indicate that inflation will remain structurally low," it adds. Maintaining a tight control on finances, reduction of subsidies, capex investments and curtailing of black money mean inflation will trend lower, according to the report.
Focus on efficiency with reforms: The four biggest reforms which have been touted as must-haves are: 1) Tax reforms, 2) Land acquisition, 3) Labour and 4) Irrigation.
Even as critics consider reforms process to be sluggish, PhillipCap says activity on all fronts has gathered pace with the conclusion of one of the most productive Parliament sessions.
(Posted by Devika Ghosh)
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