Given BJP’s Record, Stay In­vested to Gain from Earn­ings Growth

The Economic Times - - Markets & Finance -

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.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.