Elections & markets: Challenges for Modi 2.0 and key investment themes

Market veterans have called for improvement in ease of doing business and policies to encourage FDI flows to invest in long-gestation infrastructure projects and recapitalise financial firms.

Equity market scripted history on Thursday, as both benchmarks – the S&P BSE Sensex and Nifty50 – scaled new milestones of 40,000 and 12,000 levels, respectively after the election results showed Narendra Modi-led NDA clear winner in the Lok Sabha elections 2019. The poll outcome was better-than-expected and improved upon the exit polls’ tally released last Sunday.

Most D-Street experts welcomed the election verdict as the mandate was clear and was even better than what the NDA got in 2014. However, they cautioned that the next five years will be more challenging for the government, as the economy is facing a lot of headwinds.

“It's a historic mandate. The people of India have given a decisive mandate and expect decisive economic outcomes. The task of the government is cut out and they need to take bold decisive decisions to accelerate economic growth. The strong mandate to incumbent government reflects the aspirations of young India to emerge a superpower in the next five years. To achieve this, we need over 10 per cent GDP (gross domestic product) growth,” said Pankaj Murarka, Fund Manager & Founder at Renaissance Investment Managers.

MODI 2.0 FACES AN UPHILL TASK

Most analysts believe that the new government faces an uphill task in reviving the economy ranging from consumption slowdown, liquidity crisis, farm distress, unemployment to stagnant private sector investment.

“Lack of adequate liquidity and high real interest rates are stifling aggregate demand. Sectors like non-bank finance companies (NBFCs), real estate and automobiles are precariously perched and unless rescued through immediate intervention can further hurtle the economy on a downswing,” said Ajay Bodke, CEO, PMS Prabhudas Lilladher, in an e-mailed note.

This apart, market veterans have called for improvement in ease of doing business and policies to encourage foreign direct investment (FDI) flows to invest in long-gestation infrastructure projects and recapitalise financial firms.

Garima Kapoor, an economist at Elara Capital, notes that unlike the first five years, the solution to the problems that the economy is currently facing is complex and requires a radical shift in the economic policy.

"If the first five years of the government were dominated by housing, roads and toilets, the next five would have to be dominated by investment, jobs and nursing of the dislocated financial sector. Among immediate priorities, we expect the Modi-led 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," Kapoor added.

On the global front, oil prices and trade war tensions continue to be the key risks to the Modi government.

EQUITIES BEST INVESTMENT OPTION

Given that the election related uncertainty is behind us, analysts suggest investors with a long-term investment horizon can look at equities as an asset class. However, they do caution against the steep valuations at which the markets are trading at and advocate a ‘buy on dips’ strategy.

"Sensex CAGR (compound annual growth rate) of approximately 13 per cent over last the 10 years proves that equity as an asset class has the potential to deliver best performance over the long-term. There is ample evidence that long term investors are expected to earn impressive returns, irrespective of geopolitical or domestic events," said Dhiraj Relli, MD & CEO at HDFC Securities.

THEMES/STOCKS TO BET ON

Cement, private lenders, chemicals and infrastructure, defence, energy and PSUs (public sector units) are some of the sectors analysts remain bullish on.

“We continue to remain positive on private sector corporate banks (ICICI Bank, Axis Bank, SBI, Federal Bank) as key structural investment theme for next two years due to peaking of asset quality issues. Also, we like specialty chemical/API space as structural growth theme (UPL, SRF, Atul, PI Industries, Granules, Hikal, Divi’s Lab etc)," says Gaurav Dua, senior vice-president, head – strategy & investments at Sharekhan by BNP Paribas. He is also bullish on Gujarat Gas, IGL, BEL and NTPC.

This apart, analysts expect broader market to embark upon fresh bull-run with significant upsides and outperform the benchmarks over the next few months. 

“In terms of segments, mid and small caps have corrected strongly over the past 12-18 months. Such companies tend to rally in a bullish phase and hence investors should have some exposure to them,” said Ankur Maheshwari, CEO Equirus Wealth Management.