"India Election 2009 Report"
With the UPA regaining power, this time without the Left's support, what does it mean for India?
No more political instability risk for India; the new government poised to complete its 5-year term successfully.
Near-term positive because of smooth transition – this is more like an extension of UPA's term. In the event of any other party/alliance coming to power, it would have taken some time for the new government to formulate its policies.
UPA to continue with its policies with more power in hand now; no fear of strange coalitions or drag of the communist parties anymore.
Near-term positive for the markets
Equity markets are likely to open with a big gap up on Monday, as desperation to deploy excess cash (both by DIIs and FIIs) will be high. While FIIs may show interest in large caps, DIIs may hunt for beta (chasing mid caps).
India has underperformed other emerging markets (EM) YTD because of election concerns. However, stable government at home and strong global liquidity are likely to drive India's outperformance hereon. We expect Nifty to rally to ~4200 level in the near-term. Further upside for individual large cap stocks will depend on other triggers.
Markets in the medium to long term will remain linked largely to global liquidity and economic recovery. New government's policy initiatives (or lack of it), will determine India's relative under-performance/out-performance vis-à-vis other EMs.
Bond market is likely to rally in the near-term, as fiscal deficit concerns reduce for the moment (with no possibility of Third Front coming to power now). Equity is likely to get re-priced upwards. (Note: Fiscal risks have reduced, but still remain, and could push yields up in H2-FY10).
INR to appreciate, as India's sovereign risk diminishes with political stability. Continued FII inflows will also push INR up.
Economic reforms may speed up; fiscal concerns remain
FDI inflows into the country over the next 6-12 months can improve as India gets to play a larger role in G20 and the stability of the India model is better appreciated.
Areas like insurance may see an upsurge.
Government is likely to continue to boost credit to support growth.
Budget (possibly in July) is the next key event and markets may actually be sluggish around that time.
Fiscal deficit in the medium-term is likely to remain a concern. Likely large supply of government papers over the next 3-6 months will also put a cap on the market.
Government does not have resources to step up capital expenditure overnight. It is likely to address capital investments by encouraging quasi-government agencies (like NHAI and NHB) and public-private partnerships (PPP).
Rural focus and reforms on UPA's agenda
Disinvestments - Pressure on fiscal position will push the government for disinvestments, though moves are unlikely to be very aggressive.
Infrastructure - Focus on low-cost housing and power generation.
Focus on rural populace: Improve access to rural credit at lower interest rates; subsidise food for poor; implement NREGA; develop rural infrastructure.
Introduction of GST in FY10.
The UPA may try to focus on fulfilling promises it had made in the past regarding reforms in the banking and insurance sectors.
There is no key state election coming up over the next two years (except Maharashtra), which gives the government additional freedom to take tough stance on tax reforms, infrastructure investments, external policies etc.
Recommend to focus on domestic sectors versus global
Continuation of policies will benefit sectors like:-
Banking and insurance (reforms in the sector)
Power, construction and capital goods (infrastructure investments to continue)
Real estate (cheaper loans, better job market/income outlook may bring demand back)
Telecom (3G auction)
Retail (FDI limit may be raised)
Agro-based industries (continued focus on rural populace)
Financial services (improved capital market outlook and greater market activity)
Consumption sectors may not get further boost over the next 1-2 years, as we do not expect any major tax reliefs from the government (given fiscal deficit and UPA government's ability to take tough stance). IT will continue to be driven by global sentiments; INR appreciation would dampen sector performance.
Select midcaps will add alpha to the portfolio as outlook on India story improves.
Our recommended stocks are Bharti Airtel, L&T, Reliance Infrastructure, Kotak Mahindra Bank and M&M among large caps; and Crompton Greaves, United Phosphorous, Indiabulls Real, Pantaloon Retail, Shree Renuka Sugars, Yes Bank, Sintex, KEC International, TV18 and Jyoti Structures among mid caps.
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