Keep calm and carry on

Regardless of the outcome, fundamentals will prevail post the knee-jerk reaction to the election

The rebound in stock prices in India has lifted the spirit of many investors. But the story was acutely different some months ago. Markets tumbled sharply from 11,000-plus to around the psychological 10,000 mark, a swift drop of over 10 per cent. This sharp volatility unnerved some investors.

As the markets quickly rebounded after a pull-back and regained 500-plus points, investors began to heave a sigh of relief. Though difficult, in volatile times, it’s important to stay calm and run through the reasons for a sell-off.

The above reasoning is important, since more such volatility will be seen in an election year. As the decibel levels increase during elections, marketmen will begin to predict which party will win how many seats, and so on and so forth. If the prognostications are not accurate, it will tend to increase the choppiness in the markets. But that only means that investors will get more opportunities at lower levels to participate and buy on the dips in the stock market. Regardless of the election outcome, fundamentals will prevail post the knee-jerk reaction in case the election results are different from the expectations of the markets.

Earnings looking up

The economy has shown great resilience after the demonetisation shock, teething troubles with the implementation of the Goods and Services Tax, IL&FS crisis, US Federal Reserve rate hikes, trade war scare, high oil prices and rupee volatility.

Over the next few years, a slow and gradual pick-up in India’s GDP growth is a strong possibility, which could see an increase in GDP to higher levels.

There has been a gradual build-up of momentum in earnings growth in the last couple of quarters driven by IT, auto, speciality chemicals and consumer-driven sectors.

Growth momentum in the financial services space will continue to be more tilted towards private sector players.

However, the corporate banking space, including the large PSU banks, looks particularly interesting. The NPA cycle seems to have peaked out, the asset resolution bodes well, capex cycle is slowly gathering pace, and the base for next financial year is very favourable.

The surprise factor has been a strong pick-up in IT sector revenues and profits, with the initial numbers from the big IT companies showing a sharp uptick in profitability. Also, the strong traction in consumer-driven sectors continued despite various challenges that continued to surprise investors.

Infrastructure is another area where a strong uptick in earnings can be expected on the back of a strong uptick in order books. At the same time, the traction of the order book increase is being seen in engineering companies, too. Capex-driven sectors such as capital goods and cement, too, could see a pick-up in the next few quarters.

An increase in airlines traffic points to an overall increase in consumption. All in all, there’s a good chance that earnings will remain upbeat, and even surprise the street.

Lately, the hitch though, has been a tight fiscal situation, with the fiscal deficit likely to marginally overshoot budgeted targets. The possibility of populist measures by the government close to the election continues to unnerve investors.

Another concern is the volatility in oil prices. Oil prices moved very sharply from $55-60 per barrel to $87, and moved back to $60. Such volatility in prices, going ahead, needs to be watched carefully.

Global trade wars have elevated global risks, and will continue to put pressure on the rupee. Protectionism is rising across the globe, which will also curb trade in the global markets. Besides, the US Fed, despite the recent hikes, continues to maintain a hawkish tone.

We believe that growth will take precedence over all the negative issues in the long run, and hence, we are bullish in the medium to long term. In the short term, one can expect bouts of volatility, but these should not be of concern for the long-term investor.

The writer is Chief Executive Officer, Taurus Mutual Fund

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