The BJP led NDA government returned to power with a clear majority, a feat last achieved by Indira Gandhi in the late 1970s. The ruling coalition will now control 65% of the lower house. This coupled with a near majority in the upper house sets the stage for further reforms and policy action. From a market point of view, the election results have added to the attractiveness of India as an investment destination. The market is likely to view the return of the Modi government extremely positively; We expect the government to announce further economic and governance reforms over the next few months.
Five Years – Pain to Glory
Modi Government 1.0 took several policy actions with a long gestation period. This was possible due to the majority mandate in 2014. The results in 2019 are a reaffirmation of these policies. We expect the government to continue with tough policy changes in the coming years in the build up to 2022 (India’s 75th year of independence). The government is likely to have a multi-pronged approach addressing issues in infrastructure, employment and business reform. The primary objective will remain to bring growth back on track while stabilizing the economy.
With a return to power, the markets expect round 2 of political and economic reform. We believe these reforms will be stepping stones to stronger and a more sustainable economic growth that balances the benefits between the social sector and the private sector.
A strong mandate is likely to see a rerun of strong reformist policy action. Our analysis of the current macro-economic environment points to 4 major stresses
Infrastructure Development – While the last 5 years saw a resurgence is infrastructure execution, a lot more needs to be done. Impetus on social issues across health, sanitation and education are likely to lead the way for more investment in infrastructure and allied sectors.
Tight Liquidity – The issues with NBFC’s and the liquidity in the economy continue to plague lending across the sector severely affecting consumption and growth. Steps by the RBI and the Finance ministry to alleviate these problems will be a priority to stabilize the economy.
Jobs Growth – The growth in the economy over the last five years was driven largely by jobless growth. Furthermore, sectors like auto, auto ancillaries and industrial manufacturing which are typically large job creators. The budget will also be a good platform to aid key sectors of the economy.
PSU Bank Recapitalization – The government is likely to take concrete steps to improve the health of the banking sector through bank consolidations and adequately capitalizing banks currently in the PCA framework. The aim will be to kick start the credit cycle through formalized lending through public sector banks.
GST – While we believe the benefits of GST will fructify over the next 18-24 months, implementation of invoice matching and extension of e-way clearances are likely to streamline tax collection operations and minimize slippages in the system. Further simplification of GST rates will also reduce the cost of compliance especially small business owners. The hallmark of a good GST system is seamless flow of credits and minimal tax leakages.
Fixing the IBC Process – Despite its implementation in 2016, the IBC has seen limited success in resolving large bankruptcy cases. Further tightening in the litigation process will likely speed up bank recoveries and free much needed capital for the banking sector while simultaneously kick starting business activity across facilities locked up in the process of IBC. This is likely to have knock on effects in the economy.
Challenges – Global Factors
Given, India is a largely oil import dependent economy, oil will play a key role in the fortunes of the country. Oil below US$70/barrel will be positive for the economy. Global political uncertainty will also have a bearing on the economy.
How to Play the Markets?
The election results are extremely positive for the Indian equity markets, however longer term structural changes will take time and hence investors should continue to exercise caution while deploying fresh funds at this juncture. Earnings recovery is still a couple of quarters away and hence participation in a phased manner would be ideal to ride out the inherent volatility in the current markets.
We remain bullish on the India story. Given our focus on quality and are bias towards fundamentally sound business models, the big trend we are looking to play is the corporate deleveraging and operational efficiency story that is unravelling. Our investment philosophy has always looked to capture earnings driven growth over sustainably large time periods. This has worked well for us and our portfolios are testament to this philosophy.
On Mid and small caps, we believe opportunities have emerged post the steep corrections. Companies with well-defined niches and strong moats are likely to deliver above average returns within the wider mid and small cap basket. Tactical investment opportunities can be looked at in the current market environment.
Inflation is likely to remain within the RBI mandate of 4+/-2% and hence we anticipate the forthcoming RBI policy tilting towards growth. While we don’t anticipate a deep rate cut cycle but 1-2 rate cuts till Dec 2019 could be on the anvil. Banking liquidity continues to remain tight. We believe the RBI and government will announce measures to bring liquidity to neutral which will aid transmission of lower rates. Fiscal and oil prices will keep the yields of long bonds stable at current levels.
AAA spreads for 3 year corporate bonds are currently at 200 bps over Repo rate making them attractive investment opportunities at current levels. We also like 3 year AA Credit spreads which currently trade at ~300 bps above the Repo. Short AAA (1-3 year) bonds and selective AA bonds currently constitute a core position in our portfolios. We have also added some duration through long bonds.
Investors should stay invested in short to medium term strategies and actively look at credit funds. Investors may also look at medium term roll down strategies to lock in attractive rates at current levels.
Source of Data: Election Commission of India, Axis MF Research. Data as of 30th April 2019
This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable.
While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.
Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC) Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme.
Axis Mutual Fund