'Markets started building NDA's win in general elections in December 2023'

It has been a topsy-turvy fortnight for the markets. MILIND MUCHHALA, executive director, Julius Baer India in an in-person interview with Puneet Wadhwa said that they  remain positive on the small-and midcap space and would look at the current corrective phase as a good time to selectively look at companies where one is convinced about the growth of those businesses. Edited excerpts:

Do you think that the markets are fully discounting the Narendra Modi-led National Democratic Alliance’s (NDA) victory in the general elections?

The markets, probably, started building in an NDA victory in the Lok Sabha elections post the favourable outcome in a few State Elections in December 2023 itself. Hence, the discussions have been more around the number of seats rather than whether the incumbent government will be able to come back in the third term. In fact, the incremental developments in the past couple of months (inauguration of Ram temple in Ayodhya, weakening of the opposition coalition, etc.) had further cemented hopes for the same.

What’s your expectation in terms of big bang policies by the next government?

The full-year budget for fiscal 2024-25 (FY25) scheduled to be announced in June / July this year will definitely be something that will be closely watched, although some direction was probably already provided in the interim budget presented in February 2024, with the government clearly retaining its focus on fiscal discipline while continuing with the ‘quality’ expenditure capex/infrastructure agenda. Hence, the markets will monitor whether that focus/trajectory continues, while hoping there are no incremental negatives (adverse tax changes on capital gains). However, eventually the market direction will remain premised on the overall economic environment and the corporate earnings momentum in the next few months.

Which sectors can be accorded priority?

The Government’s economic growth agenda has been premised on the three pillars of: (i) Promoting domestic manufacturing; (ii) Infrastructure development; and (iii) Improving disposable income / consumption. The (full) Union Budget for FY25 is expected to largely reflect the policy continuity to support this growth agenda. It is likely to focus on recording better fiscal balances and generating space for higher social spending, while it could also provide some sops for the middle-class and rural segments to aid revival in consumption.

Can religion-related tourism be a new focus area for the government given that they have tasted success in Varanasi and the opening of Ram temple in Ayodhya?

The government’s focus on public infrastructure to drive capex growth is expected to continue with emphasis on improving domestic infrastructure and increasing the domestic manufacturing base. This could involve tweaking existing production-linked incentive (PLI) schemes or bringing new sectors under its ambit.

Domestic manufacturing clearly remains one key focus area of the Government, both for import substitution as well as positioning India as a ‘factory to the world’, as it will not only help in employee generation and overall development, but also be highly supportive for the currency, while also leading to the much-needed revival of the private capex cycle. Apart from these, tourism (including medical tourism) could also emerge as a focus area in the upcoming budget for FY25.

Should one stay away from the markets till there is clarity on the next government and its agenda?

Rather than taking a very short-term view on the markets (next two weeks or two months), equity investing should be premised on longer term growth opportunities. The stars currently seem well aligned for India, be it from a macro, micro, corporate/household balance-sheets, emerging opportunities in exports and import substitution, etc.), or liquidity perspective. We remain quite constructive on the markets and would look at any near-term volatility as an opportunity to further add to equity positions. The focus should remain on good businesses with valuation comfort.

Is it a good time to start nibbling into the mid, small-caps as well?

We have been slightly apprehensive of the small cap (and especially the SME segment) and midcap (SMID) space for the past couple of months. The SMIDs have now started trading at a significant premium to their large-caps, creating some discomfort. We have been advocating increasing the large-cap exposure while taking some profits off the table in the SMID space.

Having said that, the SMID companies tend to do well operationally in a good economic cycle, and we believe the next few years could be a phase wherein the healthy economic growth will continue to provide strong growth opportunities to good businesses across sectors. Hence, albeit the near-term volatility, overall we remain positive on the SMID space over the period and would look at the current corrective phase as a good time to selectively look at companies where one is convinced about the growth of those businesses.