Mkt may worry if BJP fails to get 240 in LS polls: Enam

Despite BJP's phenomenal win in state elections, some experts feel the sword of Damocles still hangs over the head of the Indian equity market. Based on the Assembly poll outcome, it is not easy to believe the BJP will reach majority on its own in general elections since a phenomenon call Aam Admi Party (AAP) has arrived in the political scene, says Vallabh Bhanshali of Enam. He says the market can move up higher, but a lot depends on whether the BJP can get 240 on its own or whether it'll be forced into alliances of compromise.

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Delhi perhaps is truly reflecting the sentiment of Indians that there is room for politics of another kind, he says. The Aam Aadmi Party winning 27 out of the 70 seats proves just that. Even populist measures like the Food Security Bill did not work for the Congress considering it managed to win just eight seats.
Bhanshali feels though Congress may understand where it is going wrong, the party perhaps does not have the emotional resolve to chart a new course in such short time. Below is the verbatim transcript of Vallabh Bhanshali's interview on CNBC-TV18 Q: Your initial reactions to what looks like a four out of four and a very resounding victory in two states for the Bharatiya Janata Party (BJP)? How would the markets read this going into make?
A: Hats off to the Indian public. Indian public has gone beyond populism and mere campaigns and sloganing and I think it is fantastic. Congratulations to all the parties; Congress has done very well in Chhattisgarh and so on. Obviously it is the phenomenon of Aam Aadmi Party (AAP) which pleases me tremendously which should please every Indian that there is room for politics of another kind. It is very early days and one has to wait and see how far we go. However, one thing that comes out from a market point of view is that no more denial. You will have to take grassroot reality into account and you will have to come out of an ivory tower view that this is what the public wants. Public has said that they have aspirations and those aspirations better be met. It is a fantastic message; I am extremely happy. Q: The key point for the market now is we still have about six months to go for general elections. How will the Congress government react to this? Will they say that populism has not worked let us focus on economics and if people have job they can take care of their own expenses or will the government say that let us go to the other extreme of populism and let us try to contain whatever damage we can. What do you think is likely and how would the market react in that case?
A: To be fair to the Congress and the UPA they had started reacting differently ever since Chidambaram became the Finance Minister the second time. Number of steps have been taken, but obviously it was too late to make an impact in the short-term. Therefore I don’t think that the Congress is not going to read this message very clearly. However, the question arises that do they still have just not the intellectual ability but do they have the emotional resolve to chart a new course and also probably to present a different picture to having been in denial for so long and having been so stuck in a strategic approach whether they can make a big change quickly enough is the question.
It is just not about Congress and BJP really speaking because one does not see BJP reach majority on its own and therefore whether the next government will be a stable government or not that is a damocles sword that is going to hang over the markets quite significantly particularly in light of AAP phenomenon. What happens if AAP is able to win 50-75 seats in the next election, which I don't think can be ruled out. Q: Governance changes always have a dramatic swing impact on markets. If you look at the corporate level itself where there have been dramatic governance changes the markets have rewarded very handsomely. Let me take an example near home. If you remember when UTI Bank got PJ Nayak as its Chairman or as its Managing Director, in a few weeks it went from Rs 19 to Rs 35; that was a MSU ridden stock and suddenly a performing or an integrity or a management scene with high on integrity led to a doubling of stock and thereafter went to become a big multibagger. We saw that similarly even in perhaps Narayana Murthy’s case - the coming back of Narayana Murthy and the extraordinary performance of Infosys, the outperformance that we saw. Do you think the markets can react with that kind of hope even before the election results come, do you think that at least the bottom of this market significantly moves up because governance changes always have swing results in the market?
A: I am a complete fan of governance and for the last several years at least - three years I have been speaking as loudly as I can that governance is going down. So, governance is everything not only something but governance is everything according to me - whether it is an individual or the country. On the second point whether this result is a pointer to solid governance 2014 May onwards?
I think it is early days to counter that. Partly I would also think the market is discounting that, market has run up, we are already at an all time high. I am not saying that market does not have scope to run up further so therefore while the market will continue to remain hopeful I don't think it can remain very sanguine that we will definitely reach that point. As I said that it is a question of whether BJP gets 240 on its own and makes a solid government or whether it has alliances of compromise and therefore governance is some distance away - that is the worry that I have. Q: I have a two part question, one is political and one is market related. I heard you say that there is a good chance the AAP may win 50-70 seats in general elections itself. Some of it will come at the expense of BJP as well while some of it will come at the expense of Congress. In that case are we looking at 2014 being a completely fractured mandate and AAP has made it very clear that they don’t want to align with any particular party. In that case are we looking at a completely fractured mandate and which is something that the markets don’t like as far as the Lok Sabha elections are concerned and in that case it is very hypothetical what would be the market reaction?
A: Interestingly I would like to maybe divert a little and talk about the Smartphone revolution. Sometime back Smartphones started out selling regular phones and it is a phenomenon, it is cultural, social revolution that people have not noticed. Just as in the Delhi election we have seen that the public is beyond Congress and BJP, why don’t we sit up and think that maybe people are beyond regional parties and fractured mandates also. It is entirely possible and therefore it is up to all the analysts and all the political parties to wake up and see that India has changed. It is not the garib, pichda, backward and so on so forth – the clichéd description of India.
Maybe India is very different and these results will further accentuate that trend. Therefore, I think in a short period of few hours one is not able to capture all the trends and possibilities. We should all be very happy that it is democracy that is winning big time. It is modern India and aspirations that are wining big time. I remain hopeful on account that at least governments that performed have come back.
Raman Singh has probably just scrapped through and therefore to that extent even while there are changes some common sensical approach has been shown by the people. So, the big question is whether we can count on this common sense spreading across the country and when 2014 elections take place people will vote strategically that let us create a solid government or they will act regionally. I am hopeful that they will act in a strategic manner but the jury is very much out. Q: In terms of how the markets might behave sectorally, would it be right to say that now cyclicals will get an even more serious look in? We have seen the rally in 2013 led largely by IT and staples but in the last few weeks we have seen staples definitely losing out significantly. The losses in ITC and to some extent even in Hindustan Unilever (HUL) much more significantly we have seen IT just stabilise and not put on weight. Do you think cyclicals will get a much more serious look in, in the months to come because that is where things are beleaguered and that is where governance changes will make a big impact?
A: I agree with you completely. I think this market has entered a new bull phase which is not to say that it is rocketing tomorrow. We must take note of some of the global factors like German chancellor Angela Merkel has come back to power, that a WTO deal has been reached which is very historic, you are having gross domestic product (GDP) revisions in countries like the UK and other places, US is closer to taper and therefore it is not a big scare but at least closer to taper than it was and so on so forth.
Therefore, a smart investor would look in areas that are laggard or maybe even falling at this point of time because if you break up the index whether it is Nifty or Sensex you clearly see that some of the valuations are already beginning to stretch and therefore the money and smart money will shift tension to the areas that you talked about. Even if you talk about interest rate revisions you don’t really see many revisions up. The new Governor probably has already gone ahead of the curve and therefore all pointers that new sectors will be the laggards, the new leading sectors will be the ones that are laggards today, I agree with you. Q: In that case last week was a bit of a tectonic shift for the market. We saw quite a bit of delivery based buying in cylicals, in private banks while we saw some selling in defensives, pharma, FMCG to a certain extent even IT. Do you think going forward if this is going to be a new bull run, we may not have a big rally but if this is a start of the new bull run cyclicals, banks some of these sectors will outperform?
A: This will be very difficult to play because I just heard ICICI Bank’s Chanda Kochhar speak at a function yesterday to say that banks are the last ones to really hear all the bad news and take all the bad hits. Therefore some of those sectors will have to be bought into early and you may have to suffer short-term losses. Therefore those are not for chicken hearted people. However, that is the way to go. Q: If you were managing your own portfolio or if you were managing a portfolio would you pull out any money at all at this juncture – taper or no taper will you pull out money at this juncture from equities?
A: I would not pull out money. I would put money in equity. I would have to be very smart. I need serious research to look into because most of the stocks worth investing are up 40-50 percent. Therefore, the market is already in a place only for smart people and there are still ideas. You generally pointed to sectors that are lagging, there will be sectors which will take a beating for the time being, but India is full of companies that can be invested into and therefore I would sharpen my pencil and put on my specs and work.