Modi 2.0: Are good days ahead?

It seems exit polls have evolved. This time all of them unanimously gave same verdict which later translated into more or less the same result. Thanks to the power of social media, this time people were pretty decisive and vocal on pro-modi or against modi. With elections over, friends will not be fighting over political issues anymore.

Talking about stock market, people have a lot of expectations from Modi Government. In general, investors are upbeat on the election result and expecting a start of bull run from here onwards. In this article, we analyse and put forward our views on what lies ahead for stock market and certain industries under Modi 2.0. We will also discuss on BJP’s election manifesto to get a sneak preview of future policy direction.

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The Positives

  • Continuation of existing Government is good for the country as there will be no major overhaul in policies and reforms. It is expected that same policies will continue with some tweaks along with some new reforms which can be introduced at a later stage.
  • Since BJP has majority, it will be easier for them to get bills passed in parliament, leading to faster reforms.
  • Political uncertainty is over and this will help to boost overall investor sentiments.
  • Mid and Small cap stocks have fallen a lot and there are many pockets of value within this space. Since FIIs predominately invest into large caps, DII & domestic investors were needed to improve sentiments in this segment. It is expected that domestic investors who have been sitting on the sidelines will start to invest in mid and small cap stocks.
  • The benefit of GST should start to reflect as organized sector shall pickup market share from the unorganized, leading to improvement in earnings.
  • Below are the top priority sectors as per BJP’s election promise:
    • Defense: Self sustainability for weapons & strengthening coastal borders.
    • Agriculture: Double farmer income. Raise support price for key crops. Interest free loans upto Rs 1 Lakh. Bring more area under micro irrigation.
    • Aquaculture: Promote cheap loans for storage & processing of sea foods. Facilitate seaweed farming.
    • Infrastructure: Upgradation of rural roads. Doubling the length of national highways by 2022. Complete Bharatmala project.
    • Taxation: Lowering the tax rate & broadening tax base to improve tax compliance in the country. Simplify GST structure.
    • Manufacturing: Make in India. Improve ease of doing business in India.
    • Startups: Setup seed fund of Rs 20 thousand crores to support & encourage startup companies.
    • Electric Vehicles: Rs 10 thousand crores to promote battery operated vehicles.
    • Airports: Expand airport network from present 101 to 200 in next five years.
    • Energy: Providing electricity connections to all villages. Achieve 175GW of renewable energy by 2022. Current installed capacity is 76GW.
  • Mark Mobius, the emerging market guru made following comment on Bloomberg, that historically we have seen many promises made during election time not getting fulfilled on the ground. If Modi can get 30% done of what was promised, it will be good enough for next wave of transformation. He still remains bullish in India as compared over other emerging markets like China or Indonesia.

The Negatives

  • High crude oil prices are hurting the country. Currently trading at $70 per barrel, it impacts our trade balance. This leaves less room for expenditure as India’s fiscal deficit is already inching towards 4% of GDP.
  • Indian economy has been getting sluggish with each quarters passing by. In Dec’18, it clocked 6.6% which is one of the slowest growth from past five quarters. Infact it has tapered from 8% from last year to these levels. With Q4 GDP numbers expected to be released by May 31, there are chances of continuation of poor growth.
  • Monsoon has been a blessing for current Government as it has been normal monsoon from last three years. The law of average may catch up this time. So far weather department is predicting a normal monsoon. Since Rural income is directly linked to monsoon patterns, it will be a key parameter to watch.
  • The distress in financial sector means, there is no money to fund next leg of growth. The easier options are to reduce interest rate but that will be a short term solution. There is urgent need to fix NPA issues in public sector banks and consolidate PSU Banks.
  • Apart from these domestic challenges, there is Mr Trump who is creating further problems for Indian economy. Rising trade war between US-China is making investors nervous and they are shy of committing any capital in emerging markets like India. Apart from that, US sanctions on Iran and Venezuela means oil prices will not come lower anytime soon. India has been key importer of oil from Iran and now with changed circumstances, we may have to buy more oil from other middle eastern countries.

Conclusion

As investor, we are inherently optimistic species. At the moment, there are both positive and negative factors at play and it depends on each individual what weight he puts on each of them. We believe market rally will be there on occasions (like Budget in July’19, 15 Aug scheme launches, etc) but it will be very selective and not broad based. Since large caps still trade at a higher valuations, it is spooking away FIIs. In this case, if large caps have to fall as earnings are not encouraging, it will have a rub on effect on mid and small cap stocks as they can fall even further. Real bull market will start once large cap index also returns to the same valuations. Having said that, there are certain mid & small cap stocks who are doing very well and are reasonably placed. Some of them have not corrected much since last one year. Investors will be looking to own those stocks which can give them comfort in terms of valuations & future earnings potential. We are evaluating these stocks and will be recommending them from time to time as part of our subscription services. Finally, never try to time the market as noone knows when it springs a surprise. Best approach will be to carefully select top stocks and continue your investment in a phased manner. This is the only way which works, especially under current scenario which is neither bright nor very gloomy.

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