‘Market expecting positive end to the elections’

A National Democratic Alliance (NDA) victory had been discounted by markets, but focus has shifted to the margin of victory. How would markets respond were the 400-seat target to not be met or if there were an NDA loss?

Following the big gains made by the ruling party in state elections in November the market rallied strongly and, in some respects, brought forward a pre-election rally. The expectations before the election got underway was for the governing party and its allies to increase their number of seats but, with lower turnout, there are some jitters in the market around the expected margin of victory. It is too early to say but looking at previous elections the patterns look somewhat similar, namely, high expectations in the beginning, some nervousness during and a positive end.

At the end of the day the market is still expecting the incumbent government to win and secure policy stability/continuity. In our view, as soon as the elections are over the market will quickly focus on the budget, due in July, with possible increase in capital gains tax as a major concern.

What sense are you getting from foreign investors? Apart from the election outcome, will “higher for longer" interest rates or anything else determine their behaviour? Are you sensing that foreign funds are unwinding the long India short China trade?

The FPIs continue to view India positively given the ongoing consumption/capex story playing out over the medium term. That said, the sentiment has changed over the past few months. China is being looked at more positively and the belief is that the worst may be over for the economy and consequently the markets. Given the huge underweight stance by most Foreign Portfolio Investors (FPIs) in China and the very cheap valuations, there is a ‘fear of missing out' (FOMO) on a strong market rally. Hence, we believe funds have reallocated from India to China over the past month or so.

What's your observation on quarterly numbers underway? Any major upsets or have they been in line?

The earnings season has so far been mainly in line, if not a little disappointing. Coming into the earnings season, the focus has been towards the IT and banking industries, and if the narrative moved towards the worst being behind, then the market would move higher. This has played out for the banking sector with NIMs (net interest margins) starting to normalise and the re-rating of the sector we believe has just started, albeit the recent Reserve Bank of India (RBI) regulatory intervention has once again dampened sentiment. For the IT sector, there still seem to be headwinds and our view remains that US interest rate cuts are important to turn sentiment positive and as we are aware, this is being pushed back to the latter part of the year.

There is one trend we are seeing across sectors; the earnings are being downgraded or analysts are cutting target prices or reducing their position from buy to hold.

The current bull run has seen sector rotation where traditionals like fast moving consumer goods (FMCG), etc., have fallen comparatively out of favour to infrastructure and capex heavy names. Your views?

FMCG companies surprised analysts on the upside with strong earnings and margins and more importantly, a changing narrative that the rural economy was starting to pick up. As a result, we have seen a strong rebound in sector sentiment from being wholly unloved to a more neutral/positive stance. We are not convinced about the rural spending pick up and would rather play the premiumisation theme through the beverage stocks.

We still like the infra sector but again would look for companies with strength in railways, and smart cities/manufacturing.

In terms of global and domestic interest rates, what is the sense you're getting?

The Federal Reserve (Fed) in their latest monetary policy stated, “that whilst inflation and jobs data was stronger than expected, the committee felt that interest rates are restrictive enough to have the desired effects albeit it would take longer than anticipated." This has moved expectations of any interest rate cuts to September at the earliest, but consensus is now November/ December. Fed Chair Powell also dismissed questions about the possibility of hiking rates (which the market liked), and at the same time ruled out the possibility of stagflation. What this means is that we will remain data dependent and perhaps the recent sell off in US equities reflects the reality of higher rates for longer and in this respect, we would caution for “unintended" consequences.

For India, there is obviously no rush for the RBI to reduce rates ahead of the Fed but, maybe flows from India’s inclusion in the JP Morgan Bond index may have the desired effect of reducing bond yields in India.

What's your advice to investors ahead of the election results?

For long term, investors should continue to invest in themes that play out over the longer term like defence, infra, renewable energy spending, electronics manufacturing sector, premiumisation across brands and, in particular, the beverage sector, and hospitality (hotels, airlines). That said, there will be volatility in the short term so waiting for clarity after the elections could also prove to be a sound strategy.

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