We see a big correction if BJP loses in 2019: Elara Capital's Raj Bhatt

If the 2019 elections result in the formation of a third-front government, the market may fall even more than what it had witnessed when the UPA-1 came to power in 2004, says Bhatt

Political uncertainty is the biggest risk for the market, said Raj Bhatt, vice-chairman and CEO, Elara Capital. The stocks could tank more than what it did after the United Progressive Alliance-1 (UPA-1) came to power in 2004, as the market has not yet priced in a Bharatiya Janata Party (BJP) defeat, Bhatt told Samie Modak. Edited excerpts:

After last year’s stupendous rally, the market this year has been weak. What’s the outlook for the rest of the year?

The market always works on sentiment, particularly of global investors. If the sentiment is bearish globally no matter how much earnings growth you have here, there will still be no effect on the market. Having said that, I would say political uncertainty is the biggest factor right now. Investors are worried that the BJP-led National Democratic Alliance (NDA) may not get a complete majority. The market has not yet priced in a BJP defeat.

Do you see a UPA-1 like correction in case BJP loses?

We could see an even more severe correction. The market will be fine if the BJP forms a minority government. But if the BJP or the NDA partners don’t get a majority at all, it will be a setback for the country. Election uncertainty will keep the market sideways. It wouldn’t have been so much of an issue, if we would have had a strong Opposition in place. Today we know that the Congress may not get a majority or near-majority. So they might have to form a coalition government. It will all depend on how it shapes up. If the 2019 elections result in the formation of a third-front government, the market may fall even more than what it had witnessed when the UPA-1 came to power in 2004.

But the market and the economy have not done that badly under coalition governments.

It depends on what kind of coalition we get. We haven’t seen a third-party coalition, which has survived for a long term. This time it can be different. It can’t be compared with anything else in the past. Parties not aligned to each other are coming together to form a government. Again if the Congress gets 200 seats, it won’t be a problem for the market. The governance narrative has changed. Even the Congress will have a different approach to governance.

What are other key concerns for the market? 

Globally, things are very volatile. Interest rates are going up in the US. The flattening of the yield curve is signalling a recession two years from now. The trigger for the recession could be anything. There is this China-US trade war or the possibility of a war between the US and Russia. There is so much geopolitical uncertainty.

Are high oil prices also a worry?

Oil has been going up as new capacities were not created in the past few years amid softness in prices. But with oil climbing back to $70 a barrel, we will once again see new investments. I don’t see oil prices going through the roof as capacities are coming up and also the use of alternative fuels is increasing. So I think the ceiling will be $80 a barrel.

Given headwind, how does one play the market at this juncture?

I would say come in for the long term. When everyone is selling, it is a good time to buy. State-owned banks can be good bets, they have corrected a lot. A lot of investors say PSU banks are dead. But I think they can emerge stronger. The entire PSU space has a lot of potential. Due to the government interference and poor governance, they are being undervalued. Some of these will get privatised at some stage. 

We have seen a lot of investors lowering their India weight. Is overseas investors’ sentiment towards India waning?

I think the political uncertainty is weighing on the sentiment. On the whole, foreign investors are very positive on India, the Narendra Modi government and its policies. If the NDA government gets a second term, we will see a lot of investments as there will be another bout of reforms.

What reforms are you looking at?

There is a lot that needs to be done. Ease of doing business still needs to improve. The next big reform can be privatisation and changes to the income tax framework. Some of the reforms have been initiated, for instance privatisation of Air India. Whichever party gets elected next should continue with the reforms process.