Markets
Ab ki baar, stock selection is star! Positioning your portfolio for Modi 3.0
Summary
- Election Results 2024: The era of coalition politics is back. But if your stock picks depend upon what Nitish Kumar or Tejashwi Yadav are thinking, perhaps equity investing is not your cup of tea. Nonetheless, Modi 3.0 may need some adjustments in your portfolio.
NEW DELHI : 9 November, 2016.
Traders on Wall Street were quaking in their boots as the day began. Overnight, US stock futures had plunged more than 5% to hit the lower circuit as Donald Trump’s startling victory in the US presidential polls sent shockwaves across the world.
Global financial markets were in doomsday mode, with Japan’s Nikkei slumping 5.4% while Hong Kong’s Hang Seng lost 2.2%. European indices too were in a sea of red in early trading.
Trump, the poster child of chaos, had petrified investors throughout the campaigning season with his fire-and-brimstone diatribe against trade deals, Washington elite, globalization, immigration and a whole lot else.
Now that the unthinkable had happened, traders braced for the financial equivalent of a category 5 hurricane.
However, the market, as is usually the case, had a mind of its own.
Despite the overnight carnage in futures trade, Wall Street stocks opened slightly higher, and gained momentum as the day progressed. At the closing bell, all the three major US indices – Dow Jones, S&P 500 and Nasdaq – posted gains.
Trump’s conciliatory victory speech certainly helped calm nerves, but participants had started fortifying their investment strategies with a hearty dose of prayers.
Over the next few weeks, even as the markets resumed their bull run, an undertone of edginess remained. After all, predicting Trump’s next move was beyond the pale of even the most sophisticated quant strategists.
Not many people admitted it, but a few words of wisdom were sorely needed to inject a dose of tranquility in these unsettled times.
In June 2017, the ‘Oracle of Omaha’, Warren Buffett, sat down for an interview with American public broadcaster PBS. He was asked a range of questions about his investment philosophy, state of the economy and his outlook for the country. Finally, when he was quizzed about the stock markets, Buffett condensed over 70 years of his investing wisdom into a couple of pithy sentences.
“I don’t try and guess when to get in and out of the market. I have owned stocks consistently since 1942....I was buying stocks the day before the election. I was buying the same stocks the day after the election. And if Hillary (Clinton) had been elected, it would have been the same thing," he said.
C for Coalition
Buffett may not have followed the Indian elections closely, but it is safe to assume that his advice to investors would remain unchanged.
The spectre of coalition politics returning in India after a decade of dominance by the Bharatiya Janata Party (BJP) has spooked investors, but analysts say the fears may be overdone.
“Please don’t be swayed by TV headlines. The fundamentals are intact for the market. There is no need to panic at all. Maybe for the next couple of days there will be some volatility till the new government is sworn in, but the market will find its feet. The long-term trajectory for the market remains in place," Rajesh Palviya, senior vice president of research at Axis Securities, told Mint.
This, in fact, is the perfect time to enter the markets for those who had missed the bus as the valuations have become palatable, though some pockets are still frothy, he added.
The market treats the word ‘coalition’ as a biblical catastrophe, with fiscal responsibility seen as the first (and biggest) casualty of the thrust-and-parry of competitive populism.
However, do coalitions really deserve this scorn?
Perhaps it would be good to remember that some of the most far-reaching reforms were undertaken by coalition governments, including liberalization (during the P.V. Narasimha Rao-led administration), the Fiscal Responsibility and Budget Management (FRBM) Act (under Atal Bihari Vajpayee) and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) under Manmohan Singh-led United Progressive Alliance.
In contrast, while the Narendra Modi government enacted key measures like the goods and services tax (GST) and the Insolvency and Bankruptcy Code (IBC), it had to backtrack on major issues such as the land acquisition bill and farm sector laws despite its majority in the previous two terms.
Some experts, in fact, feel a coalition government is the ideal outcome for Modi 3.0 as it would keep its ‘baser instincts’ in check.
Not to mention, relief for capital market participants who now may not have to worry about a hike in long-term capital gains (LTCG) tax and securities transaction tax (STT), which was seen as a distinct possibility in case the BJP stormed to power with an absolute majority for the third straight time.
“The opposition in the newly formed government has a strong position to keep the ruling party in check. Moreover, BJP’s reliance on alliance partners also means there’s a high chance that there won’t be any tinkering with the taxes for capital markets," Palka Arora Chopra, director, Master Capital Services, a financial services firm, said.
Time for Tweaking
Sometimes it takes a minor earthquake to get our furniture in order. In other words, an upheaval presents the perfect opportunity to take stock of our progress and go for the required course correction.
After a seemingly unstoppable bull run, Dalal Street’s record fall on election result day has served as the much-needed wake-up call.
“We expect a reset in the market’s hitherto cavalier investment stance toward ‘narrative’ stocks. We have struggled with the implied growth and profitability assumptions embedded in the market cap of several ‘narrative’ stocks (capital goods, electric utilities and public sector units)," Kotak Institutional Equities said in a note on 5 June.
“We find the risk-reward unfavourable for these companies, notwithstanding the sharp decline in stock prices on election day. Most of these ‘narrative’ stocks have risen sharply over the past 12-15 months," it said, adding that these counters trade at rich-to-bubble valuations and have a large downside risk.
That said, the consensus view remains that the new government will continue the recent thrust on capital expenditure. From investors’ perspective, the only fly in the ointment is valuations, and not fears over the new administration veering off course.
“We believe that the new NDA (National Democratic Alliance) government will not take this underwhelming verdict as a reason to 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, control on inflation and a strong currency," Elara Capital said in a report.
“We do not believe that there will be a significant slowdown in the ongoing nation-building programmes. Thus, we do not see any major risk to the levels of infrastructure capex / defence capex. However, the froth built in, in terms of high valuation / major growth acceleration built into the stocks may fizzle out," it pointed out.
Analysts say this is also the perfect time for investors to load up on defensives like fast-moving consumer goods (FMCG) and pharma stocks. Defensives are those sectors which are relatively immune to economic fluctuations. These stocks usually offer steady dividends and share price growth, and hence are favoured during periods of volatility or market down cycles.
“What was happening in the market prior to this verdict was that no one was buying FMCG stocks due to their subdued returns and reliance on the rural economy etc. However, the election result has made it amply clear for the government that they will have to sharpen their focus on the rural segment, because that is where they lost most seats. Not just that, the monsoon forecast is also good. In this context, rural will be a major theme over the medium term," Axis Securities’ Palviya added.
“Other sectors like pharma and auto, particularly two-wheelers, also offer a margin of safety currently. Other rural-focused segments like fertilizers and sugar too are seeing renewed buying interest. Overall, I think the market is sensing that no matter who forms the next government, the focus on rural has to be there," he added.
It was not a coincidence that on result day (4 June), when the Nifty50 index suffered its biggest single-day fall since 23 March 2020 (covid-19 crash), the gainers which bucked the trend were HUL, Nestle, Britannia Industries, Hero MotoCorp and Tata Consumer Products.
“The election result is likely to lead to a more balanced market. Risk-reward in large caps and underperforming sectors like banking and consumers appears more favourable. On the other hand, there is likely to be greater scrutiny and valuation discipline in the performing sectors like capital goods, power, defence and manufacturing," Rahul Singh, chief investment officer-equities, Tata Asset Management, told Mint.
He added that the macro parameters are likely to remain largely stable and hence provide downside support to valuations.
“However, the key data points to watch, going forward, would be the tilt of government policy and the union budget. More specifically any moderation in the capital spending outlook in favour of consumption support can further drive sectoral preferences," he added.
Whether the current correction triggers a bigger ‘flight to quality’ or ends up as a one-off event is a question for crystal ball gazers. But the message for investors is loud and clear–quality over quantity.
Stock selection, now as always, should be a function of company fundamentals, and not which political party is joining the cabinet. And frankly, if your portfolio picks depend upon what Nitish Kumar (chief minister of Bihar and leader of Janata Dal United) or Tejashwi Yadav (leader of Rashtriya Janata Dal) are thinking, perhaps equity investing is not your cup of tea.
“The 2024 election result may finally compel investors (institutional and non-institutional) to focus more on numbers and less on narratives. We would watch for any change in the stance of retail investors, who have been the major force behind the market in terms of flows. We prefer sectors with high visibility of compounding in earnings/book available at ‘reasonable’ valuations and avoid ‘narrative’ stocks," Kotak Institutional Equities added.
The Big Picture
Many market purists scoff at the idea of investors morphing into macroeconomists when it comes to evaluating stocks. Even Buffett is famously ‘macro-agnostic’, though his sharp comments on economic trends betray a deep engagement with the subject.
But for investors who want to scan the overall landscape, separating the signal from the noise is imperative.
“Are you investing in the government or are you investing in India? You should be clear in your head. Also, do you think this was the last election? There will be many more elections. So are you going to base your investment theses on governments coming and going, or the long-term growth story? Election result and all are just speed-breakers, investors should not be bothered by them," said Gaurang Shah, senior vice president at Geojit Financial Services.
The good news for investors is that the ‘India story’ remains intact, no matter how bruising the election cycles appear. The country’s gross domestic product (GDP) for fiscal year 2024 expanded at a blistering 8.2%, helped by Q4 growth of 7.8%, according to official data released on 31 May. Both figures were significantly higher compared to FY23, when Q4 growth stood at 6.2% (revised), and full-year GDP growth was 7%. This was the third successive year of 7% or above growth.
Not just that, the outlook for the economy remains cheery, both among domestic and foreign agencies. S&P Global on 29 May raised its outlook for India to positive from stable after 14 years, sparking hopes of a sovereign ratings upgrade. The global ratings agency cited India’s sound economic fundamentals, robust growth momentum and government spending for the decision.
“The positive outlook reflects our view that continued policy stability, deepening economic reforms and high infrastructure investment will sustain long-term growth prospects. That, along with a cautious fiscal and monetary policy that diminishes the government’s elevated debt and interest burden while bolstering economic resilience, could lead to a higher rating over the next 24 months," it said.
It currently assigns India the lowest investment grade rating of ‘BBB-/A-3’, which many deem patently unjustifiable for the world’s fastest growing major economy which has never defaulted on its debt.
The Reserve Bank of India (RBI), in its annual report for FY24, noted that the outlook for the Indian economy remains bright, underpinned by a sustained strengthening of macroeconomic fundamentals and robust financial and corporate sectors. It highlighted the government’s continued thrust on capex as an important catalyst for growth. “With gross fixed capital formation (GFCF) accelerating to 10.2% in 2023-24 from 6.6% in 2022-23, investment was the major driver of domestic demand, buoyed by government spending on infrastructure," it said.
However, growth in private consumption demand dropped to 3% as against 6.8% a year ago. Merchandise exports too registered a dip.
The incoming government clearly has a job on its hands. But for investors, focusing on their portfolios would be a better use of time than fretting over the goings-on in Raisina Hill.
