Elections: The Biggest Trigger

Yogesh Nagaonkar
VP - Institutional Equities
Bonanza Portfolio

Capital goods sector will benefit when the new government comes to power as it will give thrust to the manufacturing CAPEX cycle with L&T looking to be the best bet in the sector. Banking & auto sectors are going to benefit from the reversal in the interest rate cycle.

In the current scenario it can be said that the Indian markets have shrugged off the negatives and have been resilient in the recent times. What may spoil the party is a hung parliament at New Delhi. However, from Jan’14 till the day of election we may see some volatile movements and also there is a possibility of a sharp cut which may last for a fortnight or so, especially as we move closer to the election season. If we compare to other emerging markets like Russia and China, India looks more promising as the interest cycle is about to peak and a decisive government at the centre might fire the most coveted CAPEX & investment cycle.

On the earning front we feel that the Q3FY14 earnings will yield mixed results which has been the trend over the past quarters. We expect IT, Pharma and private banks to post good results and automobile and cement space will be a mixed bag. Coming down to real estate, capital goods and infrastructure companies we feel them to post weak set of numbers. Also H2FY14 earnings will be far superior to what we have witnessed in the recent quarters.

Coming to the currency front, we feel that Rupee will trade in a new range of 61 to 63. If RBI shows more concern for the growth and start taking measures for it, rupee can further appreciate and move towards 58-59. However when gold import norms are relaxed, the rupee will come under some selling pressure.

We are in the final phase of interest rate tightening. With inflation figures coming down (WPI 6.16%, CPI 9.87%) & worsening of IIP number (-2%) will force RBI to take some measures on growth front, we can expect reduction of interest rates in the near future. However, RBI might wait for a couple of months before reducing rates as the impact of Fed taper will begin. 

In the short term, Q3 earnings will be an immediate trigger but overall the 2014 Lok Sabha elections outcome will remain the single biggest trigger for our market. The election is expected to be held in April-May. The market which was placing bullish bets on a Modi-led BJP victory has off late started factoring the rise of the AAP which may result in broken electoral mandate. It is also to be seen how market reacts when the actual effect of US Fed taper begins.

Global markets are expected to do well especially as the concerns in terms of Europe have softened. Moreover, US economy has picked up very well, Dow Jones and Nasdaq has seen good rallies in the last 6 months and Nasdaq hitting an all time high suggest that Global market are in for good times. Emerging markets will continue to do well and as oil has cooled following the ease in tensions with Iran and Syria. World markets are headed for some sustainable growth in coming times.

Capital goods sector will benefit when the new government comes to power as it will give thrust to the manufacturing CAPEX cycle with L&T looking to be the best bet in the sector. Banking & auto sectors are going to benefit from the reversal in the interest rate cycle. Private Banks will outperform PSU banks which have some high NPA issues to deal with. Yes Bank looks good among the private banks. Reliance Industries will benefit from the new gas policy. The stock has underperformed a lot and can bounce back sharply in the coming months.

The advice to retail investors is to accumulate large caps like capital goods, private banks, IT & FMCG. Some midcaps can give higher returns than the large-caps as midcaps are trading at a huge discount to the large-caps but retail investors lack the expertise to pick the best ones, so it’s advisable to remain with the large caps which will generate decent returns in the long term.