An epochal verdict
This is an epochal election result. From the time I was studying engineering in 1984, I have not seen an election verdict that gave a clear majority to a single party. So much so, that all of us have got used to the notion that a single party majority is not possible in India and that coalition governments are a way of life for us. Coalitions, as we all know, come with their share of inefficiencies, which drag down decision making. In that context, this election verdict is truly epochal and is a defining moment for us in the country.
See big spurt in industrial growth
I strongly believe that we will see a big spurt in growth over the next 3 years. Don't expect anything overnight, but one can certainly expect a substantial growth spurt in the next 3 years. The administration and execution focus that the new PM has demonstrated in the past, would lead us to believe that many projects that are stuck at various stages will be the first beneficiaries in terms of getting them off the ground. I think a higher thrust on infrastructure will help industrial growth scale to double digit levels in the coming years. Within the 3 components of GDP (agriculture, industry and services), it is in industrial growth that I see the maximum traction coming in, with the new Government. And, this growth in industrial production does not, at this stage, need huge new capital investments. We just need to complete existing projects and start utilizing assets that are already being created. Sure, there are some areas like urban transportation where we need new investments urgently. But, in many other areas, it is a question now of utilizing existing capacities better and completing capacities in the pipeline. Debottlenecking projects - which involve lesser capital outlay, but which improve capacity utilization - is where I see immediate focus.
Cyclicals and midcaps offer great value
In terms of sectors and themes, I think banking, infrastructure, industrials, PSUs and the mid and small cap spaces are where I see the best opportunities going forward. Relative to earlier years, favourites like consumer goods, pharma and software I think it is the cyclicals that will offer better value going forward. Companies and businesses that thrived largely due to rupee depreciation in the recent years are unlikely to be the winners going forward. Likewise, the consumer space, which is already trading at 30 times earnings looks far less attractive to many other cyclicals which offer better value. I think there are significant re-rating prospects in the mid and small cap spaces. As I mentioned, I think we can look forward to a big spurt in industrial growth, which should drive earnings and stock prices over the next 3 years.
Secular bull market ahead for bonds
In the fixed income side, I think we are looking at a long secular bull market ahead of us. Any economy that is well administered will not have the kind of high interest rates that we have in our economy. If we believe that our economy is likely to be managed more effectively going forward, then we should look forward to a significant decline in interest rates. This may not happen overnight, but it looks to me that interest rates will come down appreciably over the next 2-3 years, from where we see them today. There are therefore a lot of opportunities in the fixed income space, particularly in the duration space. Long duration bonds hold a lot of value in my opinion, and investors should seriously consider duration based funds.
Looks like 2004-2006
If I were to look at the current phase in the historical context, we are in a period of the start of a mid-cap bull run supported by strong fundamentals which is very similar to 2004-2006. Sitting on the fence at this point in time should be avoided. It is a strong opportunity for investing based on fundamentals.
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