The general consensus about the impact of the general elections on India’s economy and earnings seems pinned to one of three situations. The re-election of one of the two national political parties symbolises the return of priority-based good governance. If the Congress-led United Progressive Alliance is re-elected on a fresh mandate by the people it should silence even the harshest critics to usher in growth across several sectors. If the Bharatiya Janata Party-led National Democratic Alliance is voted in, markets are expected to get stronger, based on the perception that its prime ministerial candidate can change the dynamics of the economy. However, the possibility of a Third Front government or a patchy coalition is largely seen as slowing the market and dampening growth.
For those who think that the elections will bring about radical changes in the Indian economy, they will do well to keep Prime Minister Manmohan Singh’s words in mind. Speaking recently at the Pravasi Bharatiya Diwas, he pointed out that although there has been a slowdown in the recent past, and 2014 will probably end at the same level as last year — with 5 per cent growth — India has averaged an exceptionally healthy growth rate of 7.9 per cent per annum for the past decade. His comments come as a reminder at a time of widespread concerns that India is beginning to lose its charm as an attractive investment destination.
For those who believe that the elections will change their fortunes, it is best to stick to the words of French philosopher Voltaire, who once said that while doubt is an uncomfortable condition, certainty is a ridiculous one.
While political hopes have always been factored into Indian investments, extrapolations about election results are not a strong or steady enough foundation to build or boost up a portfolio. Investors should remain wary and focus on fundamentally strong sectors that have economic tailwinds propelling them.
FII:
Slow but steady
The year ahead will be difficult for emerging markets, but India is expected to remain attractive enough for foreign institutional investors (FII), due to the Reserve Bank of India’s (RBI) policies on stabilising the rupee, says Abhay Laijawala, Head of Research at Deutsche Equities India. “We are not ruling out rupee volatility in 2014, but we strongly believe the currency movement will not be as disorderly as it was last year,” Laijawala told the Indian press recently. “The RBI’s proactive approach should lend stability to rupee. For FIIs, currency stability remains a core determinant of faith, and the RBI has now emerged as a key enabler of investor confidence,” he added.
Gold:
Poised to come back
Although corrections had commenced at the end of 2012, the global crash in gold prices was one of the biggest shockers of 2013. However, gold investors in India were largely cushioned against the crash: the 28 per cent fall in dollar terms only equated to about 18 per cent in rupee terms.
In its 2014 average price forecast for precious metals, Barclays says it expects international gold prices to test 2010 lows this year, at $1,205 (about Dh4,425). However, Indian analysts believe that gold will end the year at a higher price level than what it began with, despite a few difficult months in between.
The speculative fizz seems to have gone out of the metal, but with prices unlikely to have much more downside from here. Indians have reason to invest in the yellow metal, current elections notwithstanding. From a long-term perspective drawn between now and the next general election, positive returns are expected to exceed the rate of inflation.
Equities:
Prospects and perspectives
The typical mind-set of a crowd at the peak or trough of a market — when the collective mind is unwilling to consider any other option but what it believes — is best exemplified by the vastly underanalysed and oversimplified perspective of Narendra Modi’s trade policies. Neither data nor reasoning can dissuade these minds from considering any perspective other than a Modi sweep at the centre. But markets are no place for romantic notions or wishful thinking, and more intelligence-based evidence point to the depreciation of the rupee and economic recovery across the developed world as the leading themes for Indian equity investment this year.
Many analysts peg the IT and pharmaceutical sectors as their best bets for the year. Most believe that private sector banks will continue to outperform their public sector peers both in terms of financial and stock performance. Very few among them believe that continuing oil sector reforms will give larger benefits to private exploration and production players.
Insurance:
A new lease of life
According to new guidelines from the Insurance Regulatory and Development Authority (IRDA), insurance products in India will be more customer-friendly and transparent. With competition intensifying in the segment, and approximately 400 IRDA-approved products slated for imminent launch, investors are likely to benefit greatly this year from the insurance sector.
Irrespective of the political party leading the government, the guidelines that came into play at the start of the year mandate that policies offer a higher life cover, reduce the minimum period of contributions and ensure higher surrender value for policyholders.
Realty:
Ground realities at play
In the real estate sector, as is typical in the months leading up to an election, there is no major push for projects or decisions thereof. This adds to the slowdown in the sector, with several projects across the country running behind schedule. Property research firm PropEquity says, “Nearly half of the almost one million residential units under construction across the country are likely to be delayed by up to 18 months.”
The slowdown in activity is only expected to pick up after the election results are announced, based on the certainty of the next five years. However, the election is expected to aggravate labour shortage in the housing sector, putting more stress on builders and further delaying deliveries as thousands of migrant workers — especially from Bihar, Chattisgarh, Uttaranchal and Madhya Pradesh — head back to their villages to exercise their franchise, or simply to collect lucrative incentives offered by political parties.
According to the Confederation of Real Estate Developers Association of India, there is a shortage of ten million workers in the construction sector, which equates to approximately 40 per cent. This is expected to accelerate further this year because of the government’s Mahatma Gandhi National Rural Employment Gurantee Act programme, which is enticing thousands of workers to return to their villages for decent work and wages.
