In an interview with ETMarkets, Kumar said: “With no major U-turn expected, several domestic focussed sectors are poised to perform well under the new regime; such as Infrastructure, Construction & allied sectors, Cement & Auto,” Edited excerpts:Sensex hit fresh record highs after the initial dip. Do you think it will be a smooth ride for Modi 3.0?
The electoral outcome, although not in accordance with market expectations, is indeed not a big negative outcome for the markets.
While the Government will indeed have to take allies on board for major decision making, we expect continuity in economic policy making.While the incumbent government securing its third term bodes well for market stability, it does juxtapose them with some dependency on allies for imperative policy decisions.
Prima facie, the journey may not be that seamless as the last two terms, given that policy implementation would need the requisite support from allies.
We would anticipate more discussion and consensus building on political topics like One Nation One election, Uniform Civil Code etc. which is not markets major concern.
We believe government’s core ideologies and policy strategies, such as capex-led nation-building, manufacturing, focus on fiscal consolidation and inflation control, are likely to remain steadfast.
Infact, the weaker than expected mandate may push government to undertake measures to address rural distress which will bode well for consumption.
Therefore, while the initial reaction might be cautious, we remain constructive on the secular growth story that India has to offer as we expect policy continuity that would steer the economic growth.
Besides, history testifies that coalition government in India has been successful in effectively implementing the policies.
After the initial blip can we say that Indian market has bottomed out?
We believe that post the formation of the government at the helm, near term election related volatility is indeed a thing of the past.
We sure do not rule out volatility and consolidation in the interim, as markets will start focusing on other crucial events such as upcoming Union Budget, US inflation trajectory and its ramification on monetary policy path, US and some European nation elections and the geopolitical landscape.
While the markets are indeed expensive versus their historical averages, but it must be seen from the prism of significantly improved macro-economic backdrop in India.
We reckon the long-term outlook for Indian markets remains intact and markets will eventually be driven by its strong fundamentals such as high single-digit GDP growth, stable currency, and robust corporate earnings growth.
Hence, while volatility may be there, we do not see a major correction on the anvil.
If at all any correction were to happen, it would be largely driven by global factors, and as a portfolio strategy, we would be ardent buyers in such corrections and partake in India’s long term growth story.
What about policy reforms? Do you see a shift of reforms to welfare politics?
Reforms in India have generally survived the litmus test of politics, and this time around being no different, we expect BJP to continue its pace of governance and policy reforms.
We believe that the new NDA government will not take this underwhelming verdict as a reason to temper its unequivocal focus on supply side policy-making reforms and turn populist and start doling out freebies at large.
It may not be possible for the BJP to deviate from its core thought process of capex-led nation-building, manufacturing, control on inflation and a stable currency.
However, some reorientation of spending towards revenue expenditure with rural focus is quite a possibility in the third NDA term; however, we think the election outcome is unlikely to mean a dismissal of macro prudence and would not disrupt the fiscal math given the buffer of surplus RBI dividend and strong tax collections in place.
We expect the BJP-government to continue down the path of gradual fiscal consolidation. While major factor reforms (land/labor reforms) may take a back seat but the already embarked upon reforms and infrastructure investments are slated to continue without major disruptions.
Which sectors are likely to do well in the new regime? FMCG and IT stocks have picked up momentum recently. What are your views?
We continue to be bullish on domestic facing sectors/themes given that we expect policy continuity and political stability to be at the helm.
Infrastructure:
With no major U-turn expected, several domestic focussed sectors are poised to perform well under the new regime; such as Infrastructure, Construction & allied sectors, Cement & Auto.
Banking & Financials:
Banking & Financials will continue to be in an attractive zone, as it’s a sector that is still at reasonable valuations, despite the strong growth and pristine asset quality that the sector is delivering.
FMCG:
FMCG sector is another space that is expected to benefit from any increase in rural spending and consumption-focused initiatives along with favourable monsoons.
IT Sector:
While IT space is dragging because of lack of strong earnings visibility, some pockets in this pack offer opportunistic trade.
Railways, PSUs, and PSE rose in the run-up to the election outcome. Do you see derating in some of these sectors and how should investors approach them who are already invested?
We have seen PSUs and Railway stocks giving stellar returns in the recent past largely on the back of infrastructure-related thrust by the government in the Budget.
This space has undergone major transformation driven by conducive policies and improved allocation in the budget, which has consequently translated into strong order inflows for the companies operating in the space.
Since we are of the opinion that policy continuity will be at the helm of the new NDA government’s focus, the spend on infrastructure and related themes is expected to continue.
While we do not rule out any possibility of near-term volatility heading into the budget, we are confident that the focus on existing policies will remain, and the value chain will continue to benefit.
Having said that, after witnessing a strong inflow of orders for the companies operating in this space, their performance will now closely mirror the execution of existing order book along with incremental inflows.
Things that investors should avoid doing when looking at the poll outcome that might not be the ideal scenario?
Investors should avoid churning their portfolios based on election results, as long-term market performance is driven by fundamentals. Panic selling or desperate buying in response to poll results is not advisable.
Investors should shy away from making hasty decisions based on short-term market reactions to election outcomes. Also, steering clear of over-concentration in any single sector that might be directly impacted by political uncertainties is prudent.
Diversification and focus on fundamentally sound companies is the key mantra for building a balanced portfolio.
FIIs were net short in the run-up to election results. How are they viewing India for long-term investments? Have you had a chance to speak to some of the FIIs?
FIIs have been net sellers in Indian Markets over the past few years. So, the bulk of the selling is not due to election-related jitteriness.
FIIs have the option to invest in other Markets and thereby they constantly evaluate India against other alternatives available.
With some of the Emerging Markets being available at single-digit PE multiples and high dividend yield, India may indeed have appeared to be expensive to FIIs.
Also, the sense that we have is that India-dedicated funds continue to see inflows, while the overall Emerging Market funds have seen significant outflows on the back of a very strong Dollar and significant pushback in the interest rate-cutting cycle in US.
So some of the outflows could be because of that as well. Having said this, FIIs indeed turned aggressive sellers in derivative markets just prior to the election outcome.
This could be due to multiple factors like reducing risk, hedging their portfolio, adverse risk reward etc.
Overall, the long-term view for India remains positive with structural drivers in place, especially for domestic facing sectors which are beneficiaries of the reform push that’s slated to continue by the new government.
These factors will continue to offer valuation comfort and robust earnings outlooks for FII’s to invest in India.
Is it time to reshuffle the portfolio? What is the ideal asset allocation one can look at in the 30–40-year age bracket?
We believe that asset allocations should not be too dependent on events like political outcomes, it should be aligned with the financial goal and risk appetite of the individual.
In case of an adverse outcome, some opportunistic call may be taken but by and large asset allocations are done keeping long-term view and objectives in mind.
Investors should not reshuffle asset allocation just based on the electoral outcome. Having said this, within equities, it might be prudent to reassess and possibly reshuffle portfolios to align with fundamentally strong sectors with long-term growth prospects.
For individuals in the 30–40-year age bracket, a balanced asset allocation could include a mix of equities (60-70%) and fixed income (20-30%).
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)