Updated: May 23, 2019, 09.30 AM ISTThis is more a midcap, stock selection story where you are playing a modest increase in capex, said Adrian Mowat, Emerging Markets - Equity Strategist, in an interview with ETNOW.Edited excerpts:It is a big day for us and big day for markets as well. If the exit polls are anything to go by and the reaction that the market had after reaching the fresh all-time high, could one safely say the best maybe behind us?There is a risk that we have reacted to the polls that came out over the weekend. This market is up 5% over the last five days in sharp contrast to other markets, particularly the US and China. So, quite a lot of the good news around the election result is already priced in. As the expectation is that the majority will be even bigger for the NDA than they currently have, I do get a little bit concerned when the expectations are as optimistic as they are and we have seen some pretty good short-term gains in the market.In this kind of noisy global backdrop, trade war, what will happen to US GDP growth? A clear election mandate with majority to NDA could re-rate the Indian market substantially. What is your view?The risk in trying to make the argument for a meaningful re-rating is that valuations are already at a premium to other markets because India’s growth story is seen to be the best within emerging markets. It is the fastest growing major economy in the world and that is the fundamental fact that has been in place for some time now and that is why you get these premium valuations.Today, there is a likelihood of continuation of the NDA government. We already have them in place for the last election cycle. We have had a whole series of reforms come through. The question for the next five years is this is a story of continuity or is it a story of new reform? I think it is more a story of continuity and will be back to some of the most cyclical factors in the Indian economy.I do not expect any stimulus from the government that would make any sense at all. Stimulus typically happens ahead of elections, but you could get a little bit of a cyclical help in that, business investment decisions will have a bit more clarity around them in that there is a continuity in policy.There is an argument for a marginal increase in valuations which we have probably already seen. The other issue we constantly come back to when discussing strategy in India is that there is not one Indian market, we tend to quote the Nifty or Sensex but there is this very large polarisation both in terms of valuations performance in the market which can be within a sector let alone across sectors. That probably continues and when you are looking at a very expensive private sector bank and then try to argue for a re-rating, that is quite a tough story at this point in time.So far equity markets have not reacted to trade war. Nobody is taking cognisance of the fact that the sugar rush which American economy enjoyed in 2018 and better part of 2019 will rain away. In the NDA-1 regime, Indian markets have simply mapped global markets. Once today’s dust settles down, should we focus on trade war and other factors?From the perspective of global flows, these issues such as the trade war, US growth, China growth will continue to be important and that will drive the flows into broader emerging market risk and India obviously participates in those flows.I would say that markets have reacted to the trade war. We go back about nearly three weeks now for the sort of news that we have from Trump over that weekend, highlighting the deal was not going well. Since then, we have seen a meaningful correction in Chinese equities. We have also seen a rotation in the US equity markets , away from technology, out of companies that are impacted by tariffs and perhaps moving into financials which might be deemed as beneficiaries or interest rate sensitive.There will be opportunities because you might get a more dovish Fed. It is wrong to say that the market is not looking at the trade impact. It definitely is, when you analyse the sector and the stock performance. The question is does that trade discount continue to build? There is a risk that it does because we are unlikely to get next meaningful data point until we go to the G-10 meeting at the end of June and perhaps that is an opportunity for President Trump and President Xi to come out with a face-saving deal.We are taking a poll on line as well and want to get views from our market strategists and experts as well. Do you think that the market has already priced in a victory by the NDA because we did see quite a furious rally play out?I think the answer is yes it has. It has priced this in. Remember running into the election, there was an expectation that the continuation of the government and the downside risk was that they would have a weak coalition. We have the good news if we believe the exit polls and remember that we have only just started counting the actual polls. We have the chance that we have got a majority government. A period of political stability is good news but it has been reflected in the performance of the market since Monday onwards.The question today is what is the Nifty upside? If a stable reformist government does come to power, is the upside today 2%, 5% or 10%?I am going to say 2%.What sectors would you be betting on – corporate banks, industrials or consumption?I would look at industrials, I would look at midcaps. The logic in terms of what is the delta in terms of the economic outlook for India is that there is greater clarity when corporations are making capital expenditure decisions. So, the benefits from this would be the theme. I would not necessarily go into very expensive private sector banks which have been the more defensive place to be. This is more a midcap, stock selection story where you are playing a modest increase in capex.Also Read
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