By Rajesh Cheruvu
As highlighted by most of the exit polls the final results being pro-incumbent and single-party majority for BJP. Modi wave has actually become a Modi tsunami leading to a stable government at the centre.
The watershed 2019 Indian election has thrown a decisive mandate. This is the first ever Non-Congress government re-elected in Indian electoral history. As a result, the new government will have the ability to pursue the economic reforms initiated in the past five years. This should ensure continuity of policy and structural reforms and likely boost business and consumer sentiment which in turn will revive economic growth yet again.
Now, the focus will shift to manage macro challenges and sustain healthy growth for longer periods of time. This, we believe, will cement India s position as an attractive destination for investments relative to other emerging markets. Further, Modi 2.0 will need to handle the unfinished reforms in land acquisition, minerals allocation, direct tax code and financial sector governance and accountability.
Consumption and Quasi-banks need a booster dose
All weather demand driver, domestic consumption has met with a severe slowdown in the past couple of quarters owing to rural distress and lack of credit and tighter liquidity.
In the last nine months, borrowing models and liquidity management methods of NBFCs has been questioned. The government might address these issues and the NBFCs might get access to capital and liquidity. A delay in providing stimulus to housing finance companies could put pressure on real estate developers. The trickle-down effect we have seen post the IL&FS issue must be stopped and a delay could cause severe damage to the overall confidence in the financial system itself.
One of the ways to restore confidence in the NBFC/HFC sector is by joining the RBI in its fight against liquidity crisis. The second thing is the rationalization of GST rates by calling a council meeting. Further, the poorer transmission of lower policy rates to consumers can also be addressed by tying up with RBI.
Infrastructure and Governance reforms need top up
On the other hand, the government might continue to accelerate infrastructure spending to offset lower private capex. Fiscal consolidation could get deferred yet again, quality of spending to help avert a risk of a sovereign rating downgrade. We expect Make in India initiative likely to see traction with global manufacturing majors gaining confidence and hence leading to job creation in this term of 5 years.
FPI flows have been contingent on the political environment for policy continuity, despite the structural advantages that India offers in terms of favourable demographics, improved ease of doing business, democratic and accountability in governance and credible regulatory framework. Given the resounding mandate, FPI flows likely to surpass that of previous years.
Market driven by renewed optimism
The Nifty is currently trading at 17.9 times on a 12-month forward earnings basis, against a 3- and 5-years average of 17.2 and 16.5 times respectively. But corporate earnings have been a mixed bag this quarter as well. Valuations tend to move ahead of fundamentals with sentiment recovery and the renewed optimism will eventually help recover demand and earnings.
For now, we think that markets have priced in the event-related gains. After next week’s oath-taking, the market’s focus will likely shift back to macro factors and global events. Further momentum is expected ahead of the Budget announcement, key in understanding the new government’s road map.
We think in the next couple of weeks, a 4-5% correction is possible.
The future holds a lot of promise for India
However, medium to long term market trajectory continues to be positive with potential improvements in consumption and investment-led demand and economic activity and hence corporate earnings. Hence, suggest staying invested in equities basis risk suitability. Mid-caps continue to trade at a discount against historical averages and relative to Large caps, offering a reasonable margin of safety, hence overweight Midcaps. Construction materials and home improvement segments likely to benefit from the infrastructure and housing impetus.
(Rajesh Cheruvu is the CIO at WGC Wealth. Views expressed are the author’s own.)