ETMarkets Smart Talk: Stock market is hoping for a progressive, non-populist & capex focused Budget from Modi 3.0: Sameer Kaul

Market took a U-turn after falling by about 6% post the election results. Will the market sustain this outperformance?
Since time immemorial equity markets have always reacted sharply to outcomes which have gone against popular opinion. It is no surprise that the market cracked by a huge 6% in a single day given that “markets take the stairs up and the elevator down”.

Ahead of major defining events, market participants steadily build positions. Now once the event crystalizes all participants move in a herd for the exit all at once which causes these gyrations and spikes in the volatility index (up 24% on the election outcome day).

Secondly, the issue gets compounded by the fact that positions built prior to the event get unwound while simultaneously new positions get build based on the changed scenario.

Nonetheless, the benchmark, Nifty50 which closed at 22530 in the week before the election results was back to the same level the day after the election numbers were out.The central government of the past 10 years has not really been tested in a coalition environment. That could possibly be the key issue which is bothering the market participants. Many new investors are joining D-Street every month. Now, if someone wants to start their investment journey in 2024 – how are the next 5 years looking?
India will likely leapfrog two major economic goliaths viz. Germany and Japan over the next 3-4 years.

This confidence stems from India’s government reforms, increasing efficiencies in manufacturing, use of technology to create inclusive growth and demographic dividend.

Successive governments have normally embraced policy continuity and hence the outlook here seems to be healthy. Any informed investor looking to allocate funds to equities would look for superior growth and that is exactly what India offers.

More importantly, post Covid, the growth here has been broad based and all-inclusive wherein we have seen steady improvement not just across sectors but also across companies thus encompassing the entire spectrum right from Nifty constituents to the microcaps. We expect India to remain an attractive investment opportunity and a stronger-for-longer growth story.

A strong foundation has already been laid given the sustained pace of reforms over the past decade. So irrespective of the political backdrop we expect smooth sailing albeit with niggling irritants along the way.

We will also see a Budget session in July. Do you expect any specific reforms from a market point of view?
Firstly, all depends on the strength of the ruling party (majority/coalition). The focus of the past few budgets has been on capital expenditure and one could reasonably expect the same to continue.

The expectations are for a well thought out middle of the road approach towards balancing the books in FY’25. Market investors would hope for a progressive, non-populist, capex-focused, inclusive and fiscally prudent budget.

A budget with these contours would be well accepted by market participants especially foreign investors who have been on the sidelines recently.

Any reforms which would help corporate India become more competitive globally would be most welcome along with clarity on pieces of tax legislation where currently there is a shade of grey (ambiguity on interpretation).

Nonetheless if the past few years are anything to go by, reforms across the socio-economic landscape have been our constant companion and hence the relevance of the budget session has receded over time.

How are FIIs likely to approach D-Street amid political uncertainty? The valuation premium was on stable fundamentals but the new govt might come with a different agenda. What are your views?
FPI flows are known to react strongly in the now and the here when the event materialises.

Anyways they have been light on our market for the past 2 months and hence we believe that as the clock ticks by and clarity emerges as regards the formation of the government the FPI aggression will subside.

We believe the Indian markets are trading at fair valuations and are nowhere near frothy +1 SD kind of forward multiples. In fact post the sharp correction witnessed on the election outcome day, the market is now trading slightly below the average one year forward multiple of the past five years.

A major positive which has coincided with the election results and has got scant attention is the fall in crude below $80/bbl. Some khushi here to negate some of the gham.

We believe FPIs flows will normalise once the Budget session in July is done and dusted. The real deal here is that India is a growth oasis in the current desert of global earnings drought and hence flows will come to our shores sooner than later

Which could turn out to be a dark horse in FY25?
There are some neglected segments of the market which have seen pain over the past two years and could very well be on the last lap of the “night is darkest before dawn” phase.

Sectors which are at the top of the mind recall are the likes of QSR (Quick Service Restaurants), IT sector and Staples consumption which are currently going through a soft patch.

These laggards could very well turn the corner and come under the arc lights irrespective of the political setup in Delhi.

In addition, India is poised to become the factory to the world, as corporate tax cuts, automation, investment incentives, geopolitical compulsions and increasing brownfield infrastructure spending help drive capital investments in manufacturing and improve the ROE.

We are seeing various state governments compete to attract large corporate projects with assured speedy project clearances and necessary infrastructure to boot.

Is there a need to shuffle the portfolio amid political/reform uncertainty?
India’s nominal GDP has grown at around 12% over the past two decades with earnings growth too coming in at the same rate. We need to appreciate the fact that we are growing in double digits on a large base.

This has been possible due to the entrepreneurial acumen of corporate India. Elections do tend to have an impact, but it is more of a fleeting sentimental thing.

Markets have a mind of their own and do not care about who sits on the throne. Investors globally and locally will always check the macros and then allocate their assets. Long-term investors need not really worry about the government or its composition.

The only reason to shuffle the equity piece would be if the markets trade substantially above/below long-term valuation multiples. One also needs to take into account the overall allocation to equities and whether he/she is comfortable with the same.

Given the firm macros and expected double digit earnings growth in FY’25 we continue to keep the faith in equities. The simple all-season mantra to be followed is ‘ride the tide rather than time the ride’.

Do you think there is going to be a complete reset of the policy initiatives?
Basis the final tally, it is clear that if the NDA assumes office, it will be a quasi-majority government with the BJP having close to 90% of the required magic number to form the government.

This itself suggests that there cannot be massive annulment of the policy initiatives/programmes done over 2019-24. As long as the government is able to come close to the 5.1% fiscal deficit number for FY’25, most of the other niggling worries of equity market participants will take care of themselves.

More often than not, India has been served by coalition governments in the past. But that in itself has never been an impediment for generating decent economic growth over the long term.

Indian markets stand tall on the global stage with 14% CAGR returns for the broader market over the past 25 years during which we have seen governments of all hues.

Thus, we stand head and shoulders above the CAGR returns generated by other large economies viz. S&P 500 (5.7%), Germany (5.3%), Japan (3.5%), China (3.5%), France (2.5%).

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)