Federal Reserve: Why two-wheelers and pharma are poised to lead ahead: Ajay Bagga

“So, the idea is sound and a very distinguished committee was made on this. I am sure they have put a lot of thought into their solutions. We will have to wait and watch. It will have to clear parliament and it will have to evolve a political consensus,” says Ajay Bagga, Market Expert.

Wanted your take regarding this latest cabinet approval coming in and what do you make of it as to what the impact on businesses, markets, as well as the entire economy is going to be?
Ajay Bagga: Theoretically, conceptually, it is a good thing. Former President Kovind has run a committee on this and they have just submitted their report as well. I would like to see that report. I am sure they have taken all this into, they have factored in all this. As far as business is concerned, look at quarter one GDP this time around, the government contribution was a negative print and that brought down the country’s GDP to 6.7%. So, elections have an undermining role as far as businesses go because decision-making stalls, new order flows stall and then the new government coming on board takes time.

Secondly, the politicians instead of administering are always in election on mode. So, one election finishes and the next is on or there is a municipal election. So, the idea was to converge the national, the state and the municipal level elections all into one ballot and where voters also can vote in one go and parties can then rest assured that they will have to face the electorate after five years again and not on a regular basis nearly every two quarters have some big state coming up for election.

So, the idea is sound and a very distinguished committee was made on this. I am sure they have put a lot of thought into their solutions. We will have to wait and watch. It will have to clear parliament and it will have to evolve a political consensus. Some amount of cuts will need to be made, either the central government decides that the present Lok Sabha is coterminous with UP elections or you have UP elections which are held for a UP assembly for two years only and then UP goes for election again in 2029, those kind of things will need to be worked out and state satraps will not agree.

Nobody wants to give up power especially after 2004 when Vajpayee ji gave up power six months early thinking that the BJP is on a roll and they got defeated. After that, no politician will give up his seat on an earlier basis unless there is something in it for them.

What is the market construct looking like with the sector rotation at play, now banks making a comeback and FII participation finally has made a comeback too?
Ajay Bagga: We should look through the last three-four days of trading. I would say what are the mega trends. One, there is easing on and the Fed is the central banker to the global monetary supply.

So, as the Fed eases, there will be other banks. Already five-six banks have been ahead of the Fed, especially Canada and ECB, Switzerland. So, this easing is a pivotal moment. Second, as far as India goes, look at quarter one GDP, 7.4% growth in private consumption expenditure.

After a long time, we saw that print, but it got shrouded in that 6.7% print and the negative from the government. This quarter, the private consumption has fallen a bit, so that will become an issue as the numbers come out in mid-October and the companies start declaring the numbers.

But the third part, the flows in India, what you mentioned FII flows come back very strongly as the Fed cuts, as it starts looking for yields elsewhere.

There is $6.5 trillion sitting in US money market funds, that is not equity money, but some portion of that will get deployed into EM sovereigns.

We will get some sovereign money out of that and some portion of that will eventually come back into equities because making 5.1% in a US treasury fund was the easiest thing to do and a lot of money went into that.

So, a good amount is coming out of the marginal flows of roughly $1.5 trillion. Some part of that will come eventually into EMs and India gets a 23% share of that. So, foreign flows come back, domestic flows already very strong.
RBI, SEBI data is pointing to 25% to 35% of marginal household financial savings coming into the equity markets via mutual funds or via insurance or directly.

So, clearly, the flows are giving momentum to these markets. Markets are not cheap, that remains an issue. But the momentum remains very strong. The macro is good. You will get more than 7% for the second quarter because the government expenditure will recover from minus 1 to 14.

Anything that you are looking at in terms of a theme that is looking attractive in this market or are you just recommending to stay put and keep some powder dry for whenever the market eases off?
Ajay Bagga: No, I think volatility is Fed driven. We have to see the broader trend. Rural demand is coming back and there I think the two-wheeler pack is looking quite good. They have done well as well. Pharma reached an all-time high and we have seen some correction. But I think pharma is going to outperform, especially versus IT.

For IT, there could be some delays in the order pickup, as I mentioned last time as well. But overall, pharma and IT will do well going ahead, but both have made highs on the indices and now we are seeing some amount of profit taking coming in, but pharma should outperform and rural demand themes, so I think FMCG again did very well and we have seen some amount of fall from those levels. But as the festival season picks up over the next three months, we will get a good idea and as the harvest comes in, with a good monsoon already in, that is a positive for rural demand picking up.

Urban demand picked up in the first quarter itself and with more government spending this quarter, both of them should do well. So, durables and suppliers into the building materials, real estate companies, domestic cyclicals, I think these will do very well. PVs, there is an issue right now of volumes, so wait and watch on passenger vehicles, but two wheelers are looking the best.