What Lies Ahead For Investors- Business News
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What Lies Ahead For Investors

While the NDA's return assures political stability, concerns related to auto, infrastructure, banking, NBFC sectors, apart from reduced consumption, loom large. Here is how you can handle the uncertainty in stock markets

What Lies Ahead For Investors
Illustration by Raj Verma

Athumping mandate in favour of the BJP-led National Democratic Alliance (NDA) has not only created euphoria in stock markets but also raised hopes of uptick in economic growth.

"The NDA has got a thumbs up for its reformist policies and execution. The mandate should empower it go for more reforms," says Prateek Agrawal, Business Head and Chief Investment Officer, ASK Investment Managers. Other are also of the opinion that such a verdict will mean more reforms. "The election results are a vote for continuity of policies. We expect the government to work towards the promises it mentioned in the manifesto," says Neelesh Surana, Chief Investment Officer, Mirae Asset Global Investments.

In anticipation of further reforms and more, the broadly tracked indices, the Sensex and the Nifty, hit all-time highs on May 20, 2019, based on exit polls that predicted that the Narendra Modi-led NDA was set to win the elections and return to power. The BSE Sensex jumped 1,421.9 points or 3.75 per cent in a single day and closed at a record high of 39,352.67 points. The Nifty also gained 3.69 per cent and closed at a historic high of 11,828.25. How should investors respond to these changed circumstances?

The Big Picture

As we move ahead in 2019, sustaining the buoyancy generated by the electoral verdict will increasingly depend on changing ground realities on the domestic front. The current state of the economy is not rosy. Fall in economic growth, reduced consumption, low export growth, poor capital formation and reduced household savings are some of the indicators that show a slowdown, and they have been further accentuated by a liquidity crunch that the non-banking financial companies (NBFC) sector is facing post the IL&FS crisis.

Neelesh Surana, CIO, Mirae Asset Global

This has resulted in a slowdown in financing for key sectors such as real estate, auto and consumer durables. "The RBI did its bit by providing a monetary stimulus by cutting the repo rate by 25 basis points on June 6, 2019," says Ajay Bagga, a market veteran. "Now all eyes will be on the July 5 Budget and fiscal policies. There is a need to kick-start consumption, private corporate investments and boost household savings, especially in rural areas. The fiscal policies will determine the extent of this boost," he adds.

The July 5 Budget announcements will be an important milestone. It will be a policy roadmap that the new government is likely to follow, so the market will watch out for new reforms. Provisions that would encourage infrastructure, construction, banking and auto sectors - engines of growth that typically power an economy due to their forward and backward linkages - would hold the key to sustaining optimism. The government will have to do all this and more without increasing its borrowings and skewing its finances. While there is a difference of opinion about an imminent correction in the stock market, there is near unanimity about India's potential to deliver better returns for investors in the long run along with volatility in the interim.

At present, falling consumption is a major cause of concern for many, but experts believe that it will be back on track soon. "The consumption space has slowed down last and should recover first," says Agrawal. He argues that consumption will get a boost as election spends come back into the economy and also from the support extended to the poorer sections of the population in the February interim budget (such as direct transfer schemes) and thereafter.

The global geopolitical situation also decides the direction of India's economy. "The US-China trade dispute and slowdown in global economies are casting a shadow on Indian markets as well," says Bagga. This has led to some "risk-off" with big investors buying into safe havens such as US government securities and gold, which is reducing investments into global equity markets, adds Bagga. Not all agree, however. They feel that despite a global slowdown, India offers growth opportunities. "India stands out among the global markets which are slowing. It still offers strong growth. India's economy is domestic focussed and is seen to be less risky in a world where barriers to trade are going up. Slowing global growth has made commodities cheaper. India benefits from a fall in oil prices as well," says Agarwal.

Macro factors will have an impact on various sectors and investors have to be aware of these.

What Lies In Store

Booster dose for infra: As we have witnessed in the past, the government is focused on infrastructure development. One of the points mentioned in the BJP manifesto is spending of Rs 100 lakh crore on infrastructure in the next five years. Based on this, sector experts have started comparing India with China. "We could draw a parallel between current India and China in the 1990s. The experience from China suggests that an economic policy that improves physical infrastructure as well as human capital formation paves the way for sustainable economic growth in developing countries," says Rajesh Pherwani, Founder and Portfolio Manager, Valcreate Investment Managers.

Prateek Agrawal, Business Head And CIO, ASK Investment Managers

This will have an impact on companies too. "During the two terms of NDA government, we have seen that the government's focus is towards infrastructure development, which will benefit companies in the infrastructure space," says A.K. Prabhakar, Head-Research, IDBI Capital, adding that the government is likely to continue with policies favourable to the road sector.

One of the bigger roads projects is the Bharatmala programme. A total of 24,800 kilometres are being considered for Phase I of the programme.

In addition, the Bharatmala Pariyojana Phase I includes 10,000 kilometres of remaining road works under the National Highways Development Project, taking the total to 34,800 kilometres, at an estimated cost of Rs 5.35 lakh crore, to be implemented over a period of financial years 2018-22. The programme is likely to increase freight traffic, lower logistics costs and create employment. The huge investments will also lead to a trickle-down effect in the economy. "We expect road infrastructure to move at a high pace as the appointed dates will start coming in for the hybrid annuity model projects," says Prabhakar.

  • Consumption Revival: A higher focus on investments could result in a tangible effect on the consumption side of the equation as job creation and smoother infrastructure help businesses, eventually resulting in higher household incomes. "Better infrastructure could pave the way for improved outsourcing and exports. As a result, corporate earnings would clearly benefit and so would the overall markets," says Pherwani.
  • Good Monsoon: Agricultural growth has been weak over the past four quarters. A good monsoon, coupled with government measures to double farmer incomes, could spur growth in the agricultural sector. Higher income of farmers will translate into higher demand, which will pave the way for revival in consumption.
  • Growth in Lending: The ongoing credit crisis in NBFCs and rising non-performing assets (NPAs) of lenders is a potential risk that can disrupt the markets. However, there are still pockets of value. "Banking, financial services and insurance (BFSI) shall continue to lead growth as corporate lenders see revival in growth after the NPA cycle peaks. Retail lenders will continue to see growth together with insurance companies as credit and insurance products catch on among the under-banked," says Alok Agarwala, Head Research, Bajaj Capital. The NBFC sector could recover in 2019/20, especially companies where the impact of liquidity crunch has been low, says Pherwani.

The Opportunities

Although large-cap indices are touching all-time highs, the potential for India to become a $5 trillion economy by 2025 could create the backdrop for investor wealth creation from these levels. Mid-caps and small-caps, which have lagged large-caps in the past two years, hold even more potential as we move into the next decade. A continued upturn in sentiment will mean that sectors that have taken a beating in recent years are likely to witness a reversal of fortunes. "Discretionary consumption and BFSI continue to be good long-term structural growth stories," says Agarwala. He adds that a way to play the growth in infrastructure, construction and capital goods is to invest in providers (of goods and services) to these sectors, for instance, suppliers and financiers of cement, building material and equipment.

There is likely to be a thrust towards investment and measures to arrest the current slowdown in the economy. "We remain positive on markets as profitability in many businesses is currently low, and will revert to the mean. Corporate RoE (return on equity) is at a decadal low, and has room to improve," says Surana of Mirae Asset Global Investments. He adds that the overall markets are within reasonable valuations, with benign inflows and inflation. Surana holds a positive view on mass market consumer discretionary, financial services and insurance providers.

Prabhakar sees opportunities in the manufacturing space. He says the government has been also focussing on "Make in India", especially in the defence sector. "We believe that the government will continue to focus on indigenisation of manufacturing in the sector. This will benefit companies like Larsen & Toubro, Bharat Electronics, Bharat Dynamics, Mishra Dhatu Nigam, Cochin Shipyard and Bharat Forge," he says.

Others are also upbeat about the stock market. "Overall, markets seem to be positive and it is likely that the levels will hold. The strength in earnings expected over the next two years will permit further growth in market levels and also allow for valuation correction," says Agrawal.

What To Do?

If you are already invested in the market and have stocks that have run ahead of themselves or have been underperforming for long, you could exit from them and look for newer stories to buy into. But what if there is a sharp correction? First and foremost, don't panic and exit in haste. Downturns are opportunities to hunt for bargains, especially in areas such as capital goods, power and in other infra sectors, besides in the mid-cap space.

Investors who are well versed in stock market dynamics can easily make direct investments in stocks of sectors or companies that are in line for revival. However, other investors, who do not have the expertise or the time to do research and track investments regularly, could take the mutual fund route to capture the market opportunities if you haven't done this already. If you are invested in equity mutual funds, continue your systematic investment plans (SIPs) and eschew the temptation of booking gains. Remember, you are investing for your long-term goals and this is just a digression.

However, if you have funds that have been underperforming versus their benchmarks and peers for long, say, two years, you could consider exiting them and migrating on better performers.

The economic sentiments influencing the world of your finances have taken a turn; be prepared to take advantage of any upturn in the markets while riding out the interim volatility.

The author is a Mumbai-based freelance journalist.