The stance investors should take in Modi regime!

May 16, 2014

In this issue:
» India gives clear mandate to a single party!
» Do you have a multimillionaire mindset?
» What lies ahead for silver prices?
» Another controversy in the gas sector!
» ...and more!

The most awaited day is here now, putting all speculations to rest. While the final results are yet to be announced, the election leads so far suggests a clear and historic mandate and NDA seems poised to form a stable Government at the centre.

The Indian stock markets defied gravity in early trades today with BSE-Sensex touching life time high of 25k. The Modi wave has engulfed the markets for now, boosted by foreign money inflow. However, we wonder if there will be a rub off on the Indian economy as well which is growing at its slowest rate in the decade.

The BSE Sensex is currently trading at a trailing twelve months P/E (Price to earnings) ratio of 19x. Going by the valuations, an early economic recovery and corporate earnings turnaround seem to be already priced in. But is it realistic to assume that a new Government will revive the economy so soon? We don't think so. Even in the best case scenario, we believe that a recovery is still few years away. On the other hand, an adverse turn of events on the macroeconomic front with respect to exchange rate, crude prices or foreign money flows could rattle the markets in a matter of days.

Let's take a look at the internal state of affairs now. Going forward, for an economic recovery, India will need to boost structural and policy reforms, the list for which is unending. Announcements will hardly make a difference unless implementation follows. And India has certainly a poor track record for the latter. The need to build a consensus for the reforms and multiple stakeholders with conflicting interests are likely to prolong the process. Given the bureaucratic delays, a quick execution seems unlikely.

Until then, the investment cycle will be held back, thus restricting the economic growth. Not to mention the issues such as high inflation, twin deficits and quality of assets in the banking system that will need a lot of balancing act even as growth measures are considered.

Further, the key hurdles to growth like bureaucratic delays, land acquisition issues, high corruption, crony capitalism and labor issues among others have plagued the Indian economy for years. The new Government cannot wave a magic wand to make them disappear soon. Hence, we would suggest investors not to get carried away. More than being euphoric, we believe this is the time the investors should be cautious. Hence, we recommend investors to be realistic and follow bottom up approach in selecting stocks. Further, in order to minimize risks associated with equity investing, investors must stick to the ideal asset allocation.

Given the ground economic realities, do you think that the current euphoria in the market is justified? Let us know in the Equitymaster Club or share your comments below.

 Chart of the day
The election verdict is out. And it is unanimous. First time in history since 1984, India has given a clear mandate to a single party. At the time of writing, the Narendra Modi led NDA was leading in 333 seats out of the possible 543. It needs to win 272 seats to form a single majority. This in all likelihood appears to be quite evident. If it happens, it will be a watershed event in the history of Indian elections. Until now coalition nature of politics was the key hindrance for growth as policy making suffered in such an environment. However, a single party government by its nature would offer more freedom to Narendra Modi, in order to execute his development propaganda, on which he wooed the Indian public at large. With the people of India giving a clear mandate to NDA, the ball would be now in their court. It would be interesting to see how Modi led NDA will manoeuvre the government machinery which has been plagued with rust over the last 10 years.

India set to have a single party Government!
Note: The numbers do not indicate the final election result.

Editor's Note : As markets touch lifetime high, do you think it is time to book profits and re-enter the market at a later stage? Or could this be the start of a new bull run that could take Sensex across the 30,000 mark? Get answers to questions like these and many more in Equitymaster's Biggest WebSummit Ever!

Let's keep equities and stock markets aside for the moment. These can make you wealth over the long term no doubt. But this is your capital earning money and not you. Therefore, if you need to make millions or rather multi-millions of your own accord, you better develop a multi millionaire mindset. Multi millionaire mindset? Yes, that's right. There's a theory and a pretty successful one that an active, inquisitive mind is a hallmark of a successful entrepreneur. The most successful entrepreneurs in history were believed to have this sort of mind. Don't believe us? How many times have you tried to protect your ego when dealing with a problem you don't really understand? However, a person with a multi-millionaire mind however, asks questions incessantly. He has no ego and knows that knowledge is power. Also, we are sure; most of us are wish-focused. Not the multi-millionaire mind though. He is always analysing his own success and that of others to know how he could learn from them. Well, examples like this are aplenty. But the bottomline is that having a multimillionaire mindset is really the first step towards being really rich. To know more on this read American wealth coach & Daily Reckoning contributor Mark Ford's wealth building strategies. Check out his 11 Secrets to Building Wealth (free access).

Interest of Indian investors in gold has waned dramatically over the past few months. And the lure of stock markets in the post election scenario is not the only thing to blame. The appetite for a safe haven asset class itself has reduced to an extent. The overhang of election euphoria has pushed concerns over QE taper, Ukraine crisis, China slowdown etc to the backburner. However, in the midst of all this, gold's poorer cousin has continued to shine. As per Business Standard, with gold prices being steep, the demand for silver has soared amongst Indian investors. The demand for the white metal rose 13% in 2013, with two thirds of it coming from retail investors. The industrial demand which is a big driver for the metal remained muted all this while. However, some global regulatory and pricing norms are expected to play spoilsport for the retail demand as well. There is some confusion about the global price for silver. This is because banks in London have decided to scrap the benchmark price Indian traders have been using for more than a century. The price confusion coupled with lower trading volumes may snap the rally in silver prices sooner than expected.

The NDA, in all likelihood, is set to form the next government. But the path is not going to be easy. There will be four major issues that the new government will need to tackle as soon as it assumes office. These are bolstering economic growth, reducing fiscal and current account deficits and bringing inflation down. Inflation in particular has been a major problem for the Indian economy as a result of which the RBI has had to keep interest rates firm even when growth has slowed down. The Wholesale Price Inflation (WPI) did ease to 5.2% in April but retail inflation continues to stay high at 8.6%. Indeed, India's economy expanded 4.9% in 2013-14 after slipping to a decade-low growth of 4.5% in 2012-13. Lack of policy making has been one of the key reasons for India's lackluster growth. And so the new government will have to set the reform process high on its agenda. This, of course is no expected to happen overnight. But it is important for the new government to set the ball rolling so that the benefits start flowing in sooner than later.

The robust health of an economy lies in its small pockets. The statistics here speak for themselves. Curious? Read this. 28 million small businesses employ half of the private sector workforce in U.S. Not just that! Since 2010, half of the new jobs created by U.S. companies employed fewer than 250 employees. Hence the job creation in America is looking up today. And so does the economy that is showing early signs of improvement!

America has come a long way since the 2008 global financial crisis. "It is time to construct an economy that is built to last", opines Federal Reserve Chair Janet Yellen. Strengthening the small businesses and equipping the middle-class American worker will help construct a solid foundation, advocates Yellen. And rightly so! For it is the confidence among the U.S. small businesses that's already helping America take baby steps towards the desirable growth. For small businesses are a locomotive of growth for the national and local economies.

This economic transformation displayed by the U.S. authorities will definitely aid in restoring growth and employment. And if successful might prove an exemplar to the world too!

When two of the country's largest companies have a tiff against each other, it does become quite a dramatic event. We are referring to oil & gas behemoths Oil and Natural Gas Corporation Ltd (ONGC) and Reliance Industries (RIL). As reported in a leading business daily, ONGC has filed a case against its rival company RIL , claiming that the latter has been tapping gas from its Andhra offshore gas block. In fact the PSU major has gone on to claim that the oil ministry has simply looked away from this matter, which was highlighted by it in September 2013, and that the failure of the same has led to a loss of thousands of crores of rupees to the company. The outcome of this case will be interesting to see, especially considering that Reliance has been throwing its weight around over gas price hikes, for which it has been quite vocal in the recent past.

The Indian stock markets after surging to all-time high on strong poll mandate have been retreating back. At the time of writing, the benchmark BSE-Sensex was up by 226 points (+0.9%). Most of the sectoral indices were trading in the green with realty and banking leading the gainers. However, IT and FMCG stocks were trading in the red. Asian stock markets were trading strong with Indonesia leading gains. But the Japanese and Singapore indices were trading lower. European markets opened the day on a negative note.

 Today's investing mantra
"Behind every stock is a company. Find out what it's doing." - Peter Lynch

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2 Responses to "The stance investors should take in Modi regime!"

Sundaravaradan S

May 18, 2014

EQM is saying:::
1.Be cautious in selecting stocks.
2.Take analysed, bottom-up approach.
3. Use the ideal Asset Allocation.
4. Follow SIP route.
for the present in Modi's regime!

I think, investors have to follow this rules, in Modi regime or Rahul Regime or Mamata's regime...
It is not clear what the EQM is saying NEW???
What the whole world is saying..... is IF in Modi's Regime, if you do not invest (After following the above 4 rules) you are doomed!


Harjeet Singh Kalra

May 18, 2014

There is no magic wand that Modi can wave to improve the rate of growth of economy. The first task is to fight inflation. This will appreciate our currency based on fundamentals. The present appreciation in currency is based on surge in $ inflow which is highly volatile. Any slackening of effort in fighting inflation, controlling CAD by liberalising gold imports, can reverse this flow and depreciate the rupee faster than the rate at which it has appreciated.

Equitymaster requests your view! Post a comment on "The stance investors should take in Modi regime!". Click here!