Uphill Task Ahead For NDA 2.0

On May 23, curtains came rolling down on the 2019 General Elections and Indians gave a clear mandate favouring the BJP-led-NDA government, which  indicates continuity of familiar policies. Stability for the next five  years, given the majority earned by the ruling party, favours acceleration in  reforms. This augurs well for markets, that gave a thumbs to both the benchmarks–Sensex and Nifty, hitting the 40,000 and the 12,000 mark respectively.

With a government headed by Prime Minister Narendra Modi, all eyes would be the new cabinet minsters and who would hold the finance portfolio; as this individual would be responsible for shaping the country’s economic policies for the next five years. This puts an end to political uncertainty, which is medium-term positive and hence were duly celebrated by the markets.

The euphoria would last for a couple of more weeks but thereafter, markets would contend with other domestic factors such as earnings, fate of monsoons, crude oil prices and global developments like the impact of US-China trade talks, Brexit as well as tensions in the Middle East.

With a  stable government in the saddle for the next five years, market participants are expecting  reforms process to gather momentum. The economy was in the repair mode for the last five years. There is an optimism prevailing that the newer and much stronger government will take affirmative measures to ensure that the economic engine fires  all cylinders. The government has to ensure that rural distress is attended to, liquidity crisis in financial or debt markets is taken care of and a conducive atmosphere for industrial growth is established to capitalise on the demographic dividends of  the country.

However, the flow  is not going to be that comfortable for the NDA this time. CRISIL in one of its  reports released post-election results, cautioned that the economy is going through a cyclical downturn. GDP growth in the second half of 2018-19 had fallen to ~6.5 per cent below the trend rate of growth of India (7 per cent.) Consumption demand, which was the bulwark of the economy, has weakened and private investment is yet to show signs of a pickup. We see monetary policy turning more growth supportive and expect 25 basis point rate cut in June policy,  the report stated.

Over the next quarters, the economy should gradually recover.. Benign inflation, low interest rates and income support to small farmers will also help growth.

As consumer demand improves gradually, capacity utilisation will increase and private investments in select sectors would inch up. But a material change in the private capex cycle is unlikely this fiscal, the report mentioned. 

The report further stated that its base-case forecast sees GDP growth rising to 7.3 per cent in fiscal 2020 from 7 per cent  in  2019.

Economists with whom we spoke, also said that bringing out the economy from the slowdown phase will be somewhat difficult for NDA 2.0.

Garima Kapoor, Economist, Elara Capital  said, “Unlike the first five years, the solution to the problems is complex and requires a radical shift in the economic policy. If the first five years (2014-19) were dominated by housing, roads and toilets, the next five (2019-24) would have to be dominated by investment, jobs and nursing of the dislocated financial sector.” Among immediate priorities we expect the new government to take measures to revive consumption, address financial sector dislocation by recapitalising PSU banks, boost manufacturing sector to ensure job creation and solve the conundrum of skill shortage in the country to ensure employability, she  further mentioned.

Adding on to it, Deepthi Mathew, Economist at Geojit Financial Services said, “Unlike in 2014, NDA 2.0 has to deal with a much weaker economy. Rural distress and slowing investment in the country are two major issues that need to be addressed in an urgent manner”.

However, seasoned market players have a different opinion from economists about market movements. Amar Ambani, President and Head of Research, Yes Securities said, “The stock market likes certainty. The strength of this mandate for the BJP assures stability in government for the next five years. In all likelihood, the market will remain euphoric in the coming days. In the subsequent period, the focus will shift back to corporate earnings, liquidity situation and global events.”

Adding on to it, Gaurav Dua, Senior VP, Head, Strategy & Investments, Sharekhan by BNP Paribas said, “We expect another 5-8 per cent  kind of gains in Nifty or Sensex and much better upside in mid-cap and small-cap over the next few months. We believe that a large part of the new government policy would depend upon attracting foreign direct and portfolio investment. Thus, one could see some supporting policy moves on that front, which will  encourage household savings and attract capital market investments”.

Having a clearer picture on  market movements from experts, the next question that arises is, which are the sectors on which they can bet on and what investment strategy should they adopt?

Harendra Kumar, MD, Institutional Equities, Elara Capital elaborated, “All sectors have a cyclical risk and need to invested,  traded and managed actively. The outlook for banks and infrastructure is good and will receive a fillip.”  

On investment strategy he said, “There is no debate on the fact that in the longer-term there is no match to equities. In fact, gold has also been lagging behind. With earnings cycle mending and a stable government, there is no doubt that equities are  the best bet. Real Estate is a late cycle play and can be looked into after two  quarters”.

Commenting on sectors to focus on, Rajesh Chevuru, CIO, WGC Wealth said, “We believe, export sectors should be avoided, and domestic industry should be favoured. Sectors like construction materials and home improvement segments are likely to benefit from the infrastructure and housing impetus. Consumption and select financials can also be looked at owing to recent sell off”.

Chevuru further advised that investors should keep in mind risk appetite. “We suggest avoiding the temptation of the market frenzies and adventurism of timing the market. The equity investor is expected to give allocation and review the performance over the longer period of times,”  he concluded. 

yagnesh@outlookindia.com