How IFAs Can Prepare Clients For Uncertainties
Jun 01, 2019

Author: PersonalFN Content & Research Team

(Image source: Photo created by yanalya via freepik.com)

Number 303 seems to have a special importance in world history.

Not many of you might know that the British Army defeated the Nazis in World War II had employed the 303-rifle--the third most effective rifle of all times after AK-47 and M-16. Nonetheless, experts claim the 303-rifle has been the most destructive weapon on this planet.

Similarly, by winning 303 seats at the Lok Sabha Elections 2019, BJP has wiped out all oppositions parties. This has been the best performance by any single non-congress party in the history of India.

On the other hand, India's oldest political party couldn't open its account in 18 states.

Some political analysts are calling it a mandate from new India.

A few are calling it a debacle for Congress.

And others are calling it a mandate to finish the unfinished agenda.

Looking at the movement of stock indices post elections, it seems market is assuming this mandate to be the one for reforms and inclusive growth.

Interestingly, Modi 2.0 has spruced up its old slogan sabka sath sabka vikas by adding the flavour of inclusiveness to it. Its new slogan is, sabka sath sabka vikas, win sabka vishwas.

Does that mean one can expect Modi 2.0 to be an autocratic but populist administration?

The chances are 50:50.

What can investors expect in the next five years?

Certainly not a miracle!

Although, NDA voters are treating Mr Modi as India's messiah, the Modi 2.0 has a bumpy road ahead.

Challenges before Modi 2.0

  • According to the National Sample Survey Office's Periodic Labour Force Survey, unemployment touched a 45-year high of 6.1%, according to news stories published by mainstream media.

    In April 2019, as per the information released by the Centre for Monitoring Indian Economy (CMIE), the unemployment rate in India touched 7.60% -the highest since October 2016. And at most times the unemployment rate in the urban areas has registered a higher reading than the rural parts.

    According to a CMIE report, the unemployment amongst those who have completed their graduation or higher education has been rising steadily since mid-2017.

    This shows that India isn't producing enough employment opportunities nor has there been much improvement in FY 2018-19. After recording a thumping majority in the Lok Sabha Elections, job creation will be an even bigger challenge for the Modi 2.0 government.

  • Although Modi 1.0 promised to pay Rs 6,000 each to nearly 12 crore farmers, the agricultural distress is extremely severe to be addressed with such nominal assistance. Nonetheless, this scheme is likely to cost an exchequer Rs 72,000 crore. As you may know, India is struggling to meet its fiscal deficit target of 3.2%. Modi 2.0 may find it difficult to achieve this target.

  • The government has also promised its voters to revamp the direct tax code. It will be interesting to see how detrimentally government's revenues will be affected if the government lowers personal tax rates along with the corporate tax rates. Lower revenue would make it more difficult for Modi 2.0 to curb fiscal deficit.

  • In its election manifesto, BJP has promised to invest Rs 100 lakh crore in infrastructure development over the next five years. Modi 1.0 had also spent massively on infrastructure; yet, Modi 2.0 will find the promise of Rs 100 lakh crore worth investments tough to meet given the fragile position of India's banking sector.

  • As quoted by Mint dated May 27, 2019, India's export-to-GDP fell to 12% in FY 2018-19 - from the high of 17% recorded five years ago. It's crucial to track how Modi 2.0 handles the pressure of global trade war situation.

What these challenges mean to markets?

If the newly elected government achieves even 50% of its stated objectives, India might progress faster towards becoming a USD 5 trillion economy. However, if Modi 2.0 fails to propel the sinking private sector capital expenditure and revive demand in the private consumption, Indian voters are likely to be disappointed, so as the markets.

Moreover, markets aren't cheap anymore and it's become cliche to hear about the unimpressive performance of corporate India. Lowering tax rates is a double-edged sword. The government might have to weigh its options carefully. Markets don't like governments missing the fiscal deficit targets.

At the Price-to-Earnings multiple of 29x, Nifty 50, one of the most widely tracked Indian equity indices, looks expensive and might have already factored in some positives of Modi 2.0. Nonetheless, if Modi 2.0 delivers its promises and demand is revived, corporate earnings might improve substantially. In such a case, the PE ratio of Nifty 50 may cool off.

How should you position mutual fund portfolios?

  • Avoid sector and thematic funds, although infrastructure and economic recovery might appear attractive themes.

  • Avoid high-ticket lump sum investments guided by NDA's landslide victory. Staying with the tried and tested SIP route might pay off.

  • Utilise current market rallies to exit from weaker and perennially underperforming schemes.

  • Rebalance asset allocation, if the current market rallies have driven the weightage of equity in one's portfolio up, trimming it down to the original level would be prudent. Moreover, if markets rally continue in the absence of any pick up in earnings, one may consider reducing the equity exposure.

  • Analyse quantitative and qualitative factors meticulously before selecting a mutual fund scheme.

  • One must revisit the mutual fund portfolio once a while just to ensure the quality of mutual fund portfolio remains high, under all market conditions.

  • Mutual fund advisers should encourage their clients to invest in mutual funds depending on financial goals and the risk appetite. Investors should ideally invest across the spectrum of scheme categories.

This article first appeared on Certified Financial Guardian.  


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