The Sensex and the Nifty have reached record high levels of 22,939 and 6869 respectively on back of the NDA led government expected to come into power in the ongoing Lok Sabha elections for the year 2014. The Sensex has risen 6.27% year to date due to the election expectations even though economic growth along with elevated inflation levels and hardened interest rates continues to be tepid for the ongoing financial year. The earnings growth in some sectors has been positive but there are some sectors that have shown dismal performance. We shall explore the reasons behind the performance of sectors for the run up to the elections from year to date and give an insight as to how would they perform after the election results.
The BSE Midcap Index rose 9.92% from year to date and has outperformed the Sensex by 3.65% in the same time period. The BSE Small Cap Index rose 14.53% from year to date and has outperformed the Sensex by 8.26% in the same time period.
The BSE Bankex rose 13.55% from year to date and has outperformed the Sensex by 7.28% in the same time period. Hardened Interest rates and increased non-performing assets had dragged the performance of the index in the year 2013. The Bankex has recovered and given a stellar performance mainly contributed by the public sector banks as the RBI kept the key policy rates unchanged in the quarterly monetary policy review held in the month of April 2014. The fourth quarter earnings have shown healthy loan growth accompanied by steady growth in the Net Interest Margin (NIM) for the private sector banks. SBI had shown deterioration in the asset quality in Q3FY14 and is yet to announce the Q4FY14 results. The Credit growth has slowed down and the asset quality has deteriorated due to hardened interest rates. Banks are however expected to perform in line with expectations if a stable government is elected at the centre and that is reason Bankex has already rallied 13.55% from year to date.
The BSE Auto Index rose 8.54% from year to date and has outperformed the Sensex by 2.27% in the same time period. According to the data released by SIAM the monthly sales of automobiles continue to decline on a year on year basis with the exception being the Two Wheeler segment that has seen a sharp growth in the number of Scooters sold in the same time period. The reduction in the excise duty of cars by the Government for a brief period till June 2014 is expected to give some relief to the industry. A stable government that implements sound economic policies coupled with lowering of interest rates and inflation can revive the prospects of the Automobile industry after the elections.
The BSE Capital Goods Index rose 20.44% from year to date and has outperformed the Sensex by 14.17% in the same time period. The infrastructure stocks that include capital goods has witnessed a sharp bull run and valuations have become expensive as an expected stable government has already driven stock prices to 52 week highs. Infrastructure sector would continue to gain on expectations that the new government is likely to implement favourable policies in the immediate future.
The BSE FMCG Index rose 2.66% from year to date and has underperformed the Sensex by 3.6% in the same time period. The FMCG sector stocks have not participated in the rally before the elections. The FMCG sector has been a sharp outperformer over the last five years and is in overbought territory and hence facing selling as underperforming sectors are moving up.
The BSE IT Index declined 2.73% year to date and has underperformed the Sensex by 9% in the same time period. The appreciation of the INR has led to the underperformance of the IT sector with the Sensex. IT sector too is in overbought territory and is seeing sluggishness.
The BSE Metal Index rose 1.12% from year to date and has underperformed the Sensex by 5.14% in the same time period. Slowdown in demand for metals has dragged the performance of the sector coupled with slowdown in broad demand especially from China. Metals would continue to drag given weak China economy.
The BSE Oil and Gas Index rose 8.45% from year to date and has outperformed the Sensex by 2.17% in the same time period. The oil and gas sector has given a healthy performance on account of deregulation in the prices of petrol and diesel along with an upward revised prices for gas. The reduction in the subsidy towards petroleum products is expected to reduce the burden on the government which would reduce the fiscal and current account deficit. Even though the decision to deregulate the price for petrol and partial deregulation of the price for diesel was taken by the UPA led government the new government should continue to maintain the stance in the future to reduce the burden on the Oil exploration and marketing companies. The City Gas Distribution segment in the Oil and Gas industry is expected to continue on its growth path.
The BSE Power Index rose 1.18% from year to date and has underperformed the Sensex by 5.08% in the same time period. Coal shortages, scams, hike in prices of imported coal, lack of land availability, shortage in supply of equipment for new capacities and policy logjam have together paralyzed the prospects of power sector in India in the recent past which is reflected in the dismal performance of stocks. If the new government is able to reduce constraints in the sector then it would outperform in the near future.
The BSE PSU Index rose 9.92% from year to date and has outperformed the Sensex by 3.65% in the same time period. PSU index has rallied 9.92% on back of the expectations that the NDA led government would come into power in May 2014. The sector is expected to perform after the election results if the new government is able to design and implement policies that are favourable for its growth.
The BSE Realty Index rose 0.01% from year to date and has underperformed the Sensex by 6.25% in the same time period. Realty has not picked up as the sector continues to see a slowdown in demand due to high property prices in the metros and tier 1 cities. Although a correction is due in the property prices in the expensive locations prices are not showing a downward trend. The sector should show growth only if interest rates soften to make loans inexpensive for buyers.
Given the election scenario and the expected outcome, a stable government is expected to bring economic growth with lower inflation, reduced fiscal and current account deficit, robust infrastructure, reduced interest rates and revived investment cycle. All these factors should ideally contribute to a long term positive performance for most of the sectors in the Indian economy. However the economy cannot turnaround at once. It will take a while for business sentiment to pick up, inflation to come off and investments to revive. In this scenario, sectors that are not leveraged with steady growth prospects and stable cash flows are the sectors that will perform.
Our top picks are Banks and Financial Services as NPA growth flattens out, interest rates stay stable and lending picks up, IT given that US and Europe are showing signs of recovery and INR is still highly depreciated. Oil and Gas given that valuations are absurdly low for OMCs and Gas Distribution as it will spread to more and more areas.
Table 1: Monthly Market Movement