We believe India is on the cusp of a new bull market. Investors need to focus on the long term and look through short-term noise. Moreover, the hype around the general election seems excessive, as we do not think the outcome will materially change the medium-term direction of the market. Investors should use any volatility around the results to their advantage, to position for the long-term rally.
Market at new high on election buzz
The sensex has reached an all-time high on the election hope rally. Looking through the index to stock performance, it is clear investors are willing to overlook negatives/lack of positives at the corporate level while remaining focused on the hope of a stable, growth-supportive government at the Centre after May. This rising tide is lifting all boats, with mid-cap and cyclical stocks particularly benefiting.
Macro situation steadily improving
The Indian economy has become more resilient as a result of policy steps taken in the last year. A key success has been management of the external account - the current account deficit has come down, rupee has stabilised and foreign reserves are higher. The Reserve Bank of India (RBI) has also migrated from targeting wholesale price index inflation to consumer price index inflation while setting policy rates, and reiterated its commitment to bring inflation down over two-three years.
The third piece of the policy puzzle has been provided by the government. It has carried out fiscal consolidation - though the slowdown has affected tax revenues - through control of subsidies and other expenditure. Further, it has tried to revive the investment cycle by clearing certain policy/approval hurdles. However, growth has remained sluggish and is taking time to revive.
2014 is not 2009
It is tempting to look back at the pre- and post-election rally in 2009 while studying the prospects for 2014 - especially since the rally this year is already as strong (if not stronger) as the one in 2009. However it is important to understand the differences between 2009 and 2014. the former was characterised by a sharp recovery from the depths of the 2008 global financial crisis. Indian economy received a large stimulus from both fiscal and monetary policy as well as the tailwinds from the global recovery. This allowed the economy to quickly regain rapid growth rates. In 2014, however, we are faced with a prolonged slowdown and monetary and fiscal policies, have little room to support growth. Further, companies in the infrastructure sectors are highly leveraged and are not in a position to ramp up investments quickly. Thus we expect the growth revival to take time, about 12-18 months.
Positive outlook
The macro improvements in the past couple of years, combined with India's inherent structural advantages have set the stage for a medium term revival. We believe there is a general continuity to policy making in India, as can be seen over the last 25 years. While a growth-supportive government with a strong mandate is welcome, even a coalition government should be able to stay the course - maybe with a slower pace of decision-making. India continues to enjoy structural advantages such as high savings rate and efficient usage of capital, and can hope to enjoy high catch-up growth for several decades.
While sentiment remains focused on the election outcome, investors will do well to remain patient. Do not get swayed by short term spikes or worry about short-term volatility. We have seen that those who remain invested over the long term have made the best returns.
The author is head - equity, Axis Mutual Fund
