Given BJP’s Record, Stay Invested to Gain from Earnings Growth
vested to benefit from earnings growth resulting from the medium-term themes of (1) economic development and (2) better governance.
The market’s focus will now shift to (1) the new government’s composition, (2) its economic agenda and (3) nearterm measures to address India’s macro-economic issue and kick-start economic growth. Given the heightened expectations among market participants, it would be imperative for the next government to articulate a progressive economic agenda, especially in the areas of (1) fiscal consolidation, (2) governance and (3) investment. The next government’s first budget will also provide it an opportunity to articulate its economic agenda and announce steps for (1) short-term and medium-term improvement in India’s fiscal position and (2) improving India’s investment climate.
As a first step, it should announce a medium-term target in its first budget for the fiscal deficit through a new Fiscal Responsibility and Budget Management (FRBM) Act and take concrete steps to achieve the same.
This could entail taxation (GST) and subsidy reforms. Also, the government should announce measures to kickstart the investment cycle through a pragmatic framework for (1) acquisition of land, (2) simplification of labour laws and (3) allocation of natural resources.
Capital will not be an issue if India is able to (1) provide the right investment climate for foreign investment and (2) redirect unproductive subsidies to productive capital expenditure.
The Indian market (Nifty-50 Index) appears to be fairly valued on near-term earnings trading at 15.5X FY15E ‘EPS. However, valuations look rea- sonable at 13.7X FY16E ‘EPS’ and in the context of likely 15% per annum medium-term growth in earnings. Thus, investment sentiment will stay positive over the next few quarters led by (1) high expectations from the next government and (2) India’s improving macro-economic situation. The extent of further re-rating or sustenance of elevated multiples for parts of the market will depend on the next government’s ability to set the right economic agenda quickly. We rule out fiscal and monetary support to the economy given (1) the next government’s likely commitment to fiscal consolidation (2) high CPI inflation through FY15. Also, (1) the composition of India’s earnings (60% from outsourcing, commodity and regulated companies in the NSE-50 Index) and (2) likely slow economic recovery rule out meaningful earnings upgrades in the short-term.