Biggest risk for markets is BJP not getting majority on its own: IIFL Chairman R Venkataraman

As the election season heats up on account of a combination of ongoing state polls and the all-important general elections next year, the political outcome has become the biggest risk factor for the Indian equity markets, which could see a significant fall if the BJP fails to get majority on its own, says IIFL Securities Chairman R Venkataraman. 

“India-specific economic factors that are worrisome are not many, but worries about BJP failing to get a majority in next year’s general elections on its own have increased following reports of iffy performance in the state elections this month,” says the market veteran. 

“India will benefit from strong positioning geopolitically also. All these factors are a positive in total. But political risk, and BJP getting well below majority on its own, remains the biggest risk to markets,” he adds. 

Incidentally, global financial major Jefferies recently said the Indian stock markets could fall as much as 25 per cent if the BJP loses the 2024 elections. 

Meanwhile, according to Venkataraman, apart from the political headwinds, there are other concerns as well for the Indian capital markets though mostly are global in nature. 

“There have been concerns about crude oil levels, and while they are down back to $80 (Brent), they had been till recently above $85, and those levels begin worrying markets, as India is a major crude importer… Further, the US Fed had initially sent markets tumbling with another higher-for-longer comment before changing to a more dovish stance. While recent US jobs market data has been weak, overall GDP growth numbers at 4.9% have been stunning making markets believe in higher rates for longer, and causing equities to fall, and the Indian markets have also seen weakness in tandem,” says Venkataraman. 

He, however, believes that there is a strong demand for mid-caps and small-caps with both, domestic and foreign institutional investors, looking at the segment quite seriously. 

“There has been a marked preference for mid- and small-caps shown by FIIs and DIIs alike, with their average holdings rising steadily... historical data shows that earnings growth of small caps has been 2x or more of that of large caps, in periods of growth as well as relative stagnation,” he explains. 

In terms of earnings growth, he says that further deceleration could be expected as monetary tightening globally throughout 2022 and 2023 takes its toll on growth of Indian companies’ earnings as well though it would still be strong relative to most other large economies. 

In terms of the positives, he says Nifty 50 EPS growth could be around 20 per cent in FY24 and around 17 per cent in FY25, which are “excellent levels of growth” and the scheduled inclusion in the JP Morgan bond index next year will also lead to further inflows. 

“Emerging markets flows will stay iffy, and India may continue to see outflows. But medium term looks very good to us, and after many years, perhaps more than a decade, the US Fed is armed with 550bps (basis points) of loosening capability as inflation cools, and that augurs well for global liquidity, and hence rates and growth,” says Venkataraman.  

 

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