Markets Ride the Modi Wave

The victory of the BJP-led National
Democratic Alliance (NDA) in parliamentary
elections has triggered
a bull run in equity and currency
markets. Analysts are
already predicting the ‘mother of all bull runs’
in Indian equities. Some are even forecasting
that the rupee will appreciate
to 55 a dollar. Amidst all this
euphoria and changing investment
landscape, how should
retail investors view different
asset classes and build
a portfolio?
Equities: Between
May 12, when the exit polls
hinted at a comfortable victory
for the NDA, and May 19,
the Sensex jumped close to 6%
from 22,994 to 24,363. On the day
of the results, the Sensex breached
25,000 before settling at the 24,100 level at
the close of day.
Despite the run-up, the valuations are
still at a fair level and experts see the bull run
continuing at least for a year. Large brokerage
houses have already revised upward their
year-end target for the Nifty and the Sensex.
Nomura has raised its 2014 target for the
Sensex to 27,200 from 24,700, while Citigroup
raised its year-end target to 26,300. Though
the stock market sentiments are positive, the
investment strategy has to be different from
what it was six-eight months ago in order to
make gains. The sectoral outlook has
changed, and so has outlook for stocks of different
market caps.
The large-cap and defensive sector bias
has to give way to a high-beta, cyclical and
mid- and small-cap strategy to gain in the
short and medium term. Sectors such as energy, PSU banks, infrastructure and metals are back in
focus as pharma, FMCG and IT stocks look for a correction
in the short-term. The infrastructure sector may
see a boost in the long-term, but analyst remains cautious
on the sector. The focus is also on PSU oil companies
such as ONGC, Oil India, HPCL and IOC as steps
like rise in gas and diesel prices, lowering of subsidy
burdens are positive for these stocks.
Debt Market: The debt market has not shown the same
kind of exuberance as the equity market as it is still
cautious about the next government’s fiscal policies.
Analysts feel the new government may have to borrow
more by issuing bonds in the short term, thereby keeping
the fiscal deficit high for some time. This has led to
fall in bond prices as 10-year government bond yields
rose to 8.9% from 8.83% on May 16. “We find these fears
(the government may borrow more) unfounded. We
believe that the government would go on the path of fiscal
consolidation and sooner or later bond yields will
fall,” says Dhawal Dalal, fund manager, DSP BlackRock
Mutual Fund. He sees 10-year government bond yields
at 8.5% by December this year. Retail investors, depending
on their risk tolerance, can invest in accrual funds
(short-term funds, FMPs) or duration funds. Accruals
funds (which follow the hold-to-maturity strategy) have
given good returns in the past couple of years and can
still do well if invested at these levels.
Gold: Though gold prices are internally driven, the
metal gained domestically last year due to rupee depreciation
and import restrictions put by the government
to control the current account deficit (CAD), a situation
where imports exceed exports. However, with improving
CAD due to which the new government may ease
certain restrictions, and appreciating rupee, gold prices
are likely to correct in the 6-12 month period. “Prices
will depend on three factors: international prices, rupee
movement and government policies vis-à-vis restriction
on gold imports. If the new government eases these
import restrictions, domestic gold prices are likely to
come down in the short term,” says Chirag Mehta, Fund
Manager, Quantum Mutual Fund. However, he says that
in the long-term, sentiments remain favourable for gold.