The sharp market reaction to the election results highlights the importance of “margin of safety” as well as managing the cycles of “greed and fear”. If not the election results, the risk could have hit from any other unknown source. Stretched valuations, particularly in a few illiquid, narrative-based stocks driven by momentum chasing, have caused seasoned investors to adopt and highlight the cautious stance for the past few quarters.
While the general election results were unexpected, we have gone through such events in the past. The focus will be now on government formation, analysis of the election verdict by political parties and recalibration of policies. The market does react in an extreme manner in the short term. However, over medium to long term, the market again starts aligning with economic progress.
While policy continuity may have to be observed over next few months, many of the reforms that were put in place would continue to yield benefits. In particular, the tax collection infrastructure and overall tax collection, which have undergone a lot of repair, would continue to deliver benefits to the government for years to come.
The Indian economy remains on a solid footing on almost all parameters. India is well-placed on the fiscal and external fronts, and the economy is on an improving trend, providing us a very good handle on inflation, interest rates and currency exchange rates. This should put us in good stead in the light of volatile global macro and geopolitical issues. The fourth quarter GDP print of 8.2 percent, the Reserve Bank of India's record dividend of Rs 2,10,000 crore to government, the outlook for a normal monsoons and cooling global oil prices point to huge opportunities developing for the Indian economy. Addressing unemployment and income inequality issues can get prioritised and can help in consumption recovery.
Corporate India’s earning growth may not be largely affected by how the government may be formed. However, valuation multiples, which were on the higher side, may see some correction, particularly in the light of other emerging markets like China and Taiwan trading at very low multiples. Sectoral preferences would also undergo change to some extent with capex-related stocks taking a breather and defensive stocks from consumption, pharma, etc, doing well. Over time, the market would start focusing on the earnings growth trajectory.
Domestic flows have been strong for a long time. While some of those may be following the returns, we believe a large part of the flows is structural in nature. They are linked to the stage of the economic development, demographics and availability of alternative asset classes. Foreign institutional investors (FIIs) have been sellers for the past two to three years and have been lowering their India exposure versus international benchmarks in view of the valuations. FII flows might well see a reversal with clarity on government formations and, at a point, of valuations.
Big market moves and volatility can be used to rebalance the skew in portfolios. India’s diversified and growing economy would need and provide opportunities to all parts of the economy at various points of time. The market was one-sided for the past two to three years and this event would make the market more discerning. Sector and stock valuations would start mattering more. Such rebalancing is better left to professional money managers like mutual funds.
We have been advising to “control the greed” for a few quarters given higher valuations and euphoria in certain pockets. With this market correction, the time to “control the fear” is approaching. Such market corrections are part of the larger move—we already had experienced such market corrections during events like demonetisation, COVID, etc. In Amrit Kal, our economy and corporate profits will expand multiple times. Stocks, being slaves of earnings, will move in the same direction.
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