Market Outlook: Post Election Results

June 15, 2024 | Quick Reads

The election outcome has been both remarkable and unexpected. The National Democratic Alliance (NDA) has returned for a third term forming a coalition government. There should not be any crucial impact on the policy frameworks as previous ministers have retained major ministries, ensuring the continuity of previously announced policies.

Historical Context: Government Capex and Economic Impact

Historically, the size and influence of government capex on the economy were substantial, particularly in the 1980s when public spending played a critical role in economic growth. At that time, continuity in government policies was crucial for sustaining economic momentum.

Typically, government capex drives initial growth, which is then followed by private investment. As government policies have already set the foundation, it's time for private capex to take the lead, indicating a reduced dependency on government spending.

In India, the bull market persisted in 2004 despite a change in government and the formation of a coalition government, fuelled by the continuation of key economic policies and major private capex, resulting in a substantial market rally from 2004 to 2007.

The data mentioned below suggests that irrespective of government actions or changes, portfolio returns will ultimately reflect long-term earnings growth. Therefore, as investors, it's crucial to concentrate on sectors where corporate earnings growth is expected to be robust.

Government	NIFTY EPS CAGR	NIFTY Return CAGR
UPA 1&2 (2004-2014)	12%	14%
NDA 1&2 (2014-2024)	10%	10%

Sustained Continued Growth Expected for Key Industries

The last two terms of the BJP-led government have seen a huge budgeted capital expenditure for Infrastructure, Railways, Defence, and many more, where we have already made investment allocations to capitalize on the anticipated growth opportunities.

In addition to the global momentum towards energy transition, investments in the whole value chain have paved the way for significant growth. Concurrently, India's textile industry stands to benefit from the 'China Plus One' strategy and supply chain consolidation trends. The growth in this sector not only supports these strategies but also leads to significant employment generation in the country. Moreover, in electronics manufacturing, import substitution has strengthened Indian companies due to cost efficiencies, reduced lead times, and enhanced quality, fostering both domestic preference and increased export opportunities.

Moving forward, we also anticipate some measures towards populist measures aimed at rural development.

Rural Development: Addressing Economic Disparities

According to our observations, the current government’s approach focuses on long-term improvements in rural economies through infrastructure development, such as housing, electrification, and essential facilities, rather than short-term freebies. This strategy aims to provide sustainable economic upliftment.

Moreover, we believe that nurturing a thriving manufacturing sector will result in higher wages, particularly benefiting the bottom of the pyramid. This approach could potentially offer a sustainable solution for rural economic growth over the next decades. Emphasizing investments in manufacturing rather than short-term incentives ensures long-term growth supported by increased earnings and economic stability.

Strategy: Balancing Reactivity and Long-Term Focus

In the face of current market conditions, it is prudent to adopt a reactive rather than predictive investment strategy. Observing the formation of the new government and the distribution of ministries will provide critical insights into the future direction of economic policy. This wait-and-watch approach will allow investors to make informed decisions based on emerging data.

Furthermore, with minimal disruption in the distribution of ministries, we have been actively tracking and investing in the high-growth sectors supported by favorable policies. We anticipate continuity in policy allocation while remaining cautious about any announcements or shifts that could impact our portfolio or present future investment opportunities.

In conclusion, despite current anomalies, we remain focused on the bigger picture, confident that India's long-term growth trajectory is secure and short term challenges will not have a lasting impact. The manufacturing sector is poised to be a long-term growth driver and energy transition initiatives are expected to remain a focus, aligning with global trends.

Disclaimer:

Niveshaay is a SEBI Registered (SEBI Registration No. INA000017541) Investment Advisory Firm. Our research expresses our opinions which are based on available public information, field research, inferences, and deductions through our due diligence and analytical process. To the best of our ability and belief, all information contained here is accurate and reliable and has been obtained from public sources, which we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. This report does not represent investment advice or a recommendation or a solicitation to buy any securities.

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