BJP wins Gujarat for the sixth straight term -- but anti-incumbency takes a toll on the party's seat tally -- the Hardik Patel factor works for the Congress. However, anti-incumbency hits Congress hard in Himachal Pradesh and BJP scores a big victory in the hill state.
For the market per se, initial lead projected for congress in Gujarat sees the market lose its nerves -- but BJP's two-zero victory results in a "V" shaped recovery. The market ended in the green but off the day’s high and off the expected pole vaulting over 10,490 levels on the Nifty.
To anlayse what all the above developments mean for the market and the outlook for the next 14 months from the government CNBC-TV18 spoke to Nilesh Shah MD & CEO Envision Capital.
Shah believes that it is unlikely the government would sway away from path of fiscal consolidation and fiscal prudence. However, there would be increasing focus on areas like infrastructure, public investment in some of the core sectors and high targets on disinvestment in early part of the next calendar year, says Shah.
One can also expect lot of initiatives for the rural economy, he adds but they would be investment oriented initiatives to increase productive and investments.
It is also likely that they would revisit their focus on affordable housing, which has the potential to lift the economy, says Shah.
Although five states are expected to go to polls in 2018, Shah does not think politics will matter more but it will be the Union Budget and if the government continues on path of fiscal prudence then it would be a huge relief for equity markets.
The second milestone would be the positives of demonetisation and GST really kicking-in in 2018 and third would be earnings recovery. It is possible that we could witness a double-digit earnings recovery, says Shah.
Globally also 2018 is going to be the first big year where we will see first impact of higher interest rates and tighter liquidity and within that how much of that liquidity would come into emerging markets would be crucial.
So the drivers for the market would be the extent of earnings growth and global liquidity, which would decide if 2018 is going to be a normal year for Indian equities or is it going to be year of block buster returns for Indian equities.
Below is the verbatim transcript of the interview.
Latha: How would you interpret this result in terms of what we should expect from the government in the next 14 months, more social justice kind of policies, populism kind of policies, more pro-rural policies? Anything as an investor that you should worry about?
A: It is unlikely that the government is going to sway away from the path of fiscal consolidation and fiscal prudence. Yes, there would be increasing focus on areas like infrastructure, public investment in some of the core sectors. Some of the high targets on disinvestment is probably something which the government will focus on in the early part of the next calendar year. And then of course, a lot of initiatives on the rural economy can be expected.
But, I clearly believe that those would be more investment oriented initiatives and something which will increase productivity and increase investment. And not something which would be given out as doles or subsidies because that is something which the government has stayed away from. Of course, a lot has been done in terms of the fiscal handouts on affordable housing and I would not be surprised if that is something which will get revisited again and the scope of that gets further expanded because clearly housing is one big area which has the potential to lift the economy.
And then of course, some of those income tax slab revisions and things of that kind can happen. But, clearly it is unlikely that the government will go ahead and indulge in any kind of fiscal slippages. If at all, the government could continue on the path of fiscal consolidation and trying to ensure that the investment cycle gets kick-started significantly in 2018.
Anuj: While you could debate that the last 15-20 days, how much of market volatility was on account of Gujarat and how much was on account of global cues, that is one big state. 2018, we will have five big states going to elections. So in that sense, do you think market will have to deal with a lot of political volatility in 2018?
A: Yes, there would be surely some kind of volatility, but I guess, all those elections are scheduled for Q1 of calendar year 2018 or Q4 of calendar year 2018. And of all of that, probably Karnataka could be important because clearly that is where the Congress is in power and obviously it is going to be in a way, a fight for the BJP to win over Karnataka as well. So to that extent, that is probably the elections which will get keenly watched while the other elections are more likely in the month of December. So that is a bit far away.
So I really do not think that in 2018 it is going to be politics which will matter more. In 2018, what will matter will be the Union Budget itself which gets rolled out on February 1 and if the government continues to be on the path of fiscal prudence and fiscal discipline, that itself, is going to be a huge relief for the equity markets. So that is going to be clearly milestone number one.
And milestone number two is going to be the positives of GST and demonetisation really kicking in, in 2018. 2017 has been a year where we have really taken that hit upfront. Now is really the time for the long-term positives of both these big structural initiatives and reforms to really come in and spur economic activity and increase compliance which will result into many positives for the economy. So that is going to be the second big milestone.
And the third is of course, going to be the earnings recovery. We have been waiting for a double digit earnings recovery. It is quite possible that in 2018 we could witness a double digit earnings recovery. So our sense is that 2018 is going to be more important from the perspective of these three milestones rather than elections alone.
Surabhi: Now we are coming on the back of this phenomenal 28-29 percent growth already, appreciation in the market. Can then, once these numbers start getting real, as you are projecting, can the rally simply build on from here? I am talking about the stock price rally.
A: It is quite possible because I think it will really depend upon the magnitude of the earnings growth. That is going to be very important. So, if the earnings growth is going to be more like high single digits or low double digits, then it might be one more usual year. But, if there is a whiff of even a double digit earnings growth or even high teens earnings growth then that is something which could really catapult this market into a new zone. And that is going to be very important, so that is one.
And two, of course, is the global outlook. 2018 is going to be the first big year where we are going to see some bit of impact of higher interest rates and tighter liquidity and within that, how much of that incremental liquidity comes to emerging markets is going to be the second big driver in terms of the direction of this market. So I clearly believe it is going to be the extent of earnings growth and two is of course, global liquidity which could really decide whether 2018 is going to be a normal year for Indian equities or is it going to be the year of blockbuster returns for Indian equities.
Latha: We know the quality of stocks that you pick. We know the stocks that are your favourite. But incrementally, for the next six months or even 12 months, what would be a tactical strategy if you were a player for the next 6-8 months? Would you go long on PSU banks? Would you long on infrastructure, railway stocks? What will be the nature of stocks?
A: Clearly, 2018 again is going to be more about the spread of financialisation. So formalisation of the economy, financialisation of the savings in India, these are going to be very powerful themes. In 2018, the consumer is going to have a lot more money in his hand. So it is going to be the year of a lot of discretionary spending by the Indian consumer. And of course, last but a very important area is going to be infrastructure, but within that, it is going to be quality cement stocks, quality engineering stocks.
These are the kind of pockets which are expected to do a lot better in 2018 as they exude some bulging order books and continue to roll out double digit earnings growth. So, that is a sector which could continue to do extremely well in 2018, but otherwise, the pillars of this market continue to be around financials, around consumer and I do not see that changing in a significant manner in 2018.
Anuj: This year, we have rallied 27 percent and we have seen maybe an end of earnings downgrades. If earnings pick up, could we be looking at an encore in 2018 I terms of market move?
A: Absolutely. Clearly, that should be the thesis for 2018. As I said, of course, a strong recovery in earnings, the earnings growth stepping into the double digit zone and of course some kind of global liquidity which can provide cover. These are some of the drivers for 2018. Of course as the year progresses, we will have some important state elections and then of course, the outlook for general elections, that is something which basically start playing out towards the end of 2018.
But the most important event for 2018, first of course is going to be the government's commitment to fiscal consolidation which we will in a way, witness on February 1. But then post that, I clearly believe the strongest signal or event for this market and the economy is going to be the disinvestment of Air India.
I think that, if the government is able to pull it through and achieve that, I think that is going to be the strongest ever signal that we are going to see for many years in terms of the government's willingness to take some really hard, bold, reforms or steps because that is something which no government has been able to achieve in the last 10-15 years. So a strategic sale of Air India to me is going to be a very important trigger and a very important catalyst and driver for 2018.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
