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Posted on 5/24/2019 6:30:00 PM

 

India’s equity markets hit an all time high with the BJP-led National Democratic Alliance coming to power for the second time in a row, backed by a thumping majority. Continuity in administration brings in much-needed stability and policy predictability.

One of the key aspects of the NDA government has been its prudent approach towards macros. Backed by windfall gains from falling crude oil prices, the government successfully controlled its fiscal and current account deficit. When it comes to inflation, the government was proactive in ensuring that there were no instances of a sharp spike in food prices. We believe the resolve shown by the government — when it comes to these three factors, which are major indicators of an economy — has come in handy for the rupee being range bound, unlike past years when the local currency depreciated rapidly.

The other landmark achievement of the government was the introduction and implementation of reforms such as the Insolvency and Bankruptcy Code, Goods and Services Tax and the Real Estate (Regulation and Development) Act. The benefit each of these reforms will accrue to the economy is immense, but the results will be visible only with a lag.

THE ROAD FROM HERE ON…

The NDA 2.0 government is taking charge at a time when the global backdrop is looking increasingly challenging. The ongoing trade war between the US and China, slowing global trade and global growth are all set to pose their own set of challenges for the Indian ecosystem. The impact is likely to be more pronounced in the commodity and export-related sectors.

On the domestic front, the government will have to work consciously towards deleveraging the real estate sector. This is one step which is likely to significantly help the economy. Today, leverage associated with real estate exists in various formats such as land, construction, finance, etc., each of which needs to be addressed owing to the cumulative adverse effect rendered on the economy.

Another important step would be in creating pro-growth initiatives such that a supply side revolution is created across sectors. Apart from this, creating employment avenues and taking measures to improve exports could help boost the engine of the economy. The other important task ahead of the new government will be revitalizing public sector units through a strategic approach and policy framework, such that they turn into attractive investment opportunities. Finally, digitization which has been one of the key achievements of Modi 1.0 needs to be given further thrust such that financial inclusion and economic financialization can move forward with renewed vigor.

MARKETS

There is a sea change in the market dynamics between 2014 and 2019. In 2014, the equity market was going through a long phase of underperformance which started in 2011 and was very cheap in terms of valuations. However, that is not the case now. Today, barring PSUs, the markets are no longer cheap and many of the positives seem to have been already priced in.

We recommend investors to give prime importance to asset allocation with adequate exposure to debt. In terms of market capitalization, even though the mid and small caps have corrected relative to benchmark indices, and are attractive, those looking to initiate investments could consider doing it through the systematic investment plan. Within fixed income, we are positive on credit and accrual funds.

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