Tuesday, May 19, 2009


Elections – Game Changer?

A real mandate- with many positives — The incumbent Congress-led UPA alliance has achieved a near majority; an almost best-case scenario, and should translate into: a) Stable Government for next five years; b) More reform-oriented agenda, with greater policy making flexibility; and c) More economic/results-oriented governance (rather than the political survival/compromise nature of recent governance). In sum, the strongest Government platform in India over the last two decades, and the opportunities could be substantial.

Macro-implications; all positive, but still early to quantify or revise — A strong Government mandate should result in: a) Upward bias in growth expectations (maintain 5.5% FY10 expectations for now) - investment rather than consumption driven; b) Stronger currency - return of enhanced capital flows; c) Stable rate scenario, with a 50bps downward bias. While market expectations of a macro pick up should rise – specific policy formulations, response of the domestic economy, and the global economy environment would determine the extent of change.

Big themes – In play, but not all one way — a) Investment momentum – Likely to revive, on likely policy impetus, capital flows and corporate confidence; b) Fiscal deficit – Will remain a stress point, with initial Government spending, and a still slow economy; c) Reform/policy agenda – infrastructure, insurance, limited divestments, taxation , and social sector (employment and food guarantees); d) Earnings growth – Still too early for a micro impact. Medium/long-term implications more than immediate ones.

Market - Big Bang, Game Changer? — This should be a ‘big bang’ for the market – we expect it to comfortably hold gains at the 13000-13500 index levels for now. The big question - is it a ‘game changer’? Can India get back to the high growth - high valuation of recent years? This event probably does open up meaningful possibilities, but there’s a lot to do, and there could be a lot in the way. We see capital/liquidity-driven and beta-plays as the bigger immediate beneficiaries – infrastructure, banks, real estate and stressed balance-sheets.

Coalition still to be sewn up, ministerial allocations, and budget by July – There still are uncertainties — It's not sealed – the Congress still needs alliance partners for a simple majority and cushion (should not need to make major comprises), the allocation of key economic portfolio’s can influence expectations, and a budget needs to be presented before July-end. Should be smooth, but we cannot rule out hiccups or disappointments.

To see full report: INDIA EQUITY STRATEGY