The Indian voter has thrown the biggest positive surprise in the 2009 General elections. The recent election results are momentous from Indias perspective, because after many years we are getting a stable government at the centre. The number of seats won by the Congress also gives it overwhelming clout within the coalition.
CoalitionsSeats*
UPA262
NDA157
Third Front67
Other Parties30
Fourth Front27
Total543
* Source Election commission, IBN Live
The incumbent Congress led UPA surprising most pre poll analysis and exit polls, have managed to get an almost near majority. As they say in Bollywood, Singh is King; it is the return of the economist turned central banker turned finance minister turned Prime Minister, Dr Manmohan Singh, to continue on a much stronger platform. An important point to take note is that this coalition is of fewer like minded parties (8 parties) compared to the previous one (15 parties), so fewer moving parts. The composing parties of the UPA dont have any ideological differences either on a social front or an economic front and hence implementing its agenda would be easier. The Communist parties (Left front), whose support was critical for the better part of the tenure of the last government and which often came in the way of economic reforms, have been marginalised and most likely will have little say in how the government is run or its policies implemented over the next five years.
UPAs performance, especially that of the Congress in elections 2009 is the strongest ever shown by a single party in national elections since 1991.
Implication for Equity Markets
While primarily driven by the reversal of liquidity, the fall in the
Indian equity markets since the beginning of 2008 was also driven by the frictions that had begun to show up in the coalition of diverse parties where the Left front was critical for survival. Uncertainty over global and local factors made India, one of the worst performing markets in 2008.
Investors like certainty. With this decisive mandate, one of the major challenges and risks, political uncertainty, facing investors looking at the Indian market is now behind us.
While we continue to face uncertainty and challenges arising out of global financial markets and the jury may not still be out whether this is a bear market rally or a start of a new bull run, with this decisive mandate, one of the biggest worries of
investors in India on political uncertainty is behind us. This change is unlike a quarterly surprise or a near term positive but in fact is a medium to long term positive.
Valuation and Earnings expectations -
Indias valuation premium of the recent years had significantly contracted in the past twelve months on the back of a combination of global and local uncertainties translating into higher relative risk premium. We expect Indian equities to witness re-rating, driven by the outcome of this election (implying lower political risk) and hence we expect the base P/E to move up to 14-15x.
Consensus earnings expectations for the market have been substantially revised downwards in recent times, with the BSE Sensex earnings forecasts lowered ~30% (from peak estimates in Jan 2008) in line with downward revisions in GDP forecasts from ~8% to 5.5%. The pace of downward revisions of FY10 earnings has considerably abated and reversed to substantial upgrades in certain sectors post the recent Jan-March 2009 corporate results. Moreover, we could see earning upgrades during the course of this year on the back of acceleration in economic and social reforms, higher foreign investments, improved corporate and consumer confidence and increased investments in infrastructure. Sectors we believe can gain the most in the immediate term could be:
1. Sectors dependant on liquidity for growth: Realty, Retail & Infrastructure
2. Beneficiaries of improved demand dynamics in the rural economy: Consumer products, automobiles and cement.
3. Revival of the corporate CAPEX cycle: Capital goods, engineering and construction
4. Reform-led sectors: Power, Retail, Telecom, Banking, Insurance and selective public sector enterprises on possible disinvestment.
Sectors that may likely be disadvantaged in the near-term, mainly due to an appreciating INR include technology, commodities and pharmaceuticals.
While Indian markets have done fairly well in the recent global rally, they have underperformed other BRIC economies year till date.
Our Outlook
Of the three pillars of the Indian growth story favourable demographics led consumption, infrastructure development and outsourcing; we believe the maximum positive impact of a stable government would be on infrastructure development. While consumption will get a leg-up with sustained rural buoyancy and exports might be impacted by the strengthening rupee, the thrust of resource allocation on infrastructure will see maximum benefits. In the last 5 years of the UPA regime, the power, aviation and irrigation sectors witnessed significant progress and we believe that this thrust will sustain in this tenure as well, and may percolate to other infrastructure related sectors as well. There have been few policy initiatives in many social infrastructure sectors of healthcare, education, which may now see some remedial action in this tenure.
While one may not be able to fully capitalise in the coming days on the initial euphoria arising out of the decisive election mandate, one should view this development as a one which has long-term re-rating potential for one of the fastest growing economies of the world, despite the many challenges. The Indian markets should therefore constitute a meaningful part of the emerging market portfolio exposure for global investors.
Please note - The content of this article is based upon sources of information believed to be reliable. However, no representation, undertaking or warranty (express or implied) is given to its accuracy or completeness. The views expressed are not intended as a recommendation or for the purpose of soliciting any action in relation to any investments or to be otherwise relied upon for any purpose. Kotak Mahindra (UK) Limited is authorized and regulated by the Financial Services Authority in the United Kingdom and regulated by the Dubai Financial Services Authority & by the Monetary Authority of Singapore. Kotak Mahindra Inc is a member of FINRA.
