The recent upsurge provides opportunities to exit troubled companies facing balance sheet issues and/or business uncertainties. Another important rejig in portfolios would be to reduce exposure to consumer discretionary space towards sectors that are high on the priority list of the new government.
n its first term, the Narendra Modi government implemented bold structural reforms such as the Insolvency and Bankruptcy Bill (IBC), the Goods and Services tax (GST), a real estate regulator and demonetisation to encourage formalization of economy. These structural reforms, while they tend to impact near term growth momentum, are immensely beneficial in the long term.
We expect the Modi 2.0 government to build on these reforms to chart a sustainable growth story. Policy priorities would also focus on easing rural stress and look at ways to create meaning employment to reap the benefits of the favourable demographic mix in the country. We also expect the government to take tangible steps to shore up tax revenues and attract foreign capital to raise the required resources to meet its growth aspirations.
The majority mandate has boosted sentiments and benchmark indices are close to all time high levels. We do see scope for further gains of 5-8 percent in Nifty/Sensex from the current levels over the next few months. The upside will be support by a strong revival in earnings growth in the next two years (FY2019 to FY2021). The expected turnaround in financial performance of corporate lending banks and positive effects of the policy steps to ease the liquidity situation would boost earnings growth at the index level. Moreover, the valuations will rollover to FY2020-21 estimates in the next 4-6 months which would give valuations comfort to investors.
However, the macro challenges such as the slowing consumer demand, fiscal constraints and global uncertainties driven by trade war remain. Investors will closely track the initial policy announcements by the government for further re-rating of the markets.
On the brighter side, the buying interest in midcap space should pick up once the benchmark indices stabilize at higher levels and the investors begin to explore value in broader markets.
Time to fine tune portfolios
A rising tide pushes up all the boats and the recent event-driven upsurge is likely to provide opportunities to exit troubled companies facing balance sheet issues and/or business uncertainties. Another important rejig in portfolios would be to reduce exposure to consumer discretionary space towards sectors that are high on the priority list of the new government.
Going by the BJP’s manifesto and recent comments, the government is likely to refocus on infrastructure development with roads and water linkage project on high priority. Investment in rural sector is also likely to be high on the list of priorities for the new government. Lastly, the government will have no option but to strengthen state-owned companies either through capital infusion (in banks) or divestment (in non-core and weaker businesses).
Remain constructive on two investment themes with structural growth outlook
In addition to this, we recommend meaningful exposure to two investment themes that we have been bullish on for the last few months. First, the corporate sector lending banks are set to see a marked improvement in their earnings with peaking out of asset quality issues. Thus, they offer a re-rating driven attractive investment opportunity. However, it would be advisable to stick to private sector corporate lenders like ICICI Bank, Axis bank and Federal Bank with some exposure to large state-owned banks like State Bank of India.
Similarly, we also are positive on the agri-inputs/specialty chemical space. Many quality Indian players are well positioned to make a mark in the global markets with China losing its cost and scale advantage in this space.