Markets always have a surprise element for investors, especially for individual investors. Equity indices in India are taking everyone by surprise and quickly passing by significant milestones these days. But not long ago everything looked negative; economic growth was slumping, rupee was battered, Foreign Institutional Investors (FIIs) were cutting exposure to Indian assets and even domestic investors were showing little faith in the market.

On this backdrop, markets not only did recover but also reached a new high. Northward journey didn't stop there. The new high was breached within few trading sessions and markets made another high. In the recent years, such joyous mood of the market was previously experienced when second stimulus package was announced in the U.S. in 2010. Commodities had a nice run and also the emerging market equities. In India, the growth was relatively strong and rupee was firm against the USD. All these got investors believe that growth in India would continue to be relatively less affected by the global events. Optimism drove markets high; but reality got them back on the ground subsequently. In this process, one theme that was severely hammered was infrastructure. All infra-focused funds underperformed broader markets and diversified mutual funds. But now many experts are advising that investors should bet on infra theme and invest in cyclical sectors.

Should you bet on theme infra?
PersonalFN believes the buildup of such consensus is primarily based on the hope that Indian economy has bottomed out and would only improve hereon. The other reason to believe that infra stocks would do well is their recent performance which has been better than that of defensives for the first time in almost last 2 years.
 

Smart Recovery in infra stocks…

Data as on March 13, 2014
(Source: ACE MF, PersonalFN Research)  

As depicted in the graph above, CNX infrastructure had witnessed deeper cuts but has recovered well from the bottoms it made in August 2013. As far as performance of infra-focused funds is concerned it has improved substantially over last 6 months. Having said that, overweight of infra funds on banking stocks and some of the 'out of theme' bets have generated smart returns for investors. Banking stocks have witnessed some quick recovery over last couple of months. Considering the high weightage of the banking sector in broader indices, negative outlook on India may affect their performance negatively, since the rally is chiefly backed by inflows of foreign capital.
 

Infrastructure focused funds have outperformed…

	Returns (absolute %)
	6 Months	1 Year
Category average of Infrastructure Funds	17.6	2.5
CNX Infrastructure	14.0	4.2
CNX Nifty Index	11.0	11.0

Data as on March 13, 2014
(Source: ACE MF, PersonalFN Research)  

The primary reason for this rally is well-known now. As you would have guessed it right, it's likely change in the political regime. As we are getting closer to elections, the markets are getting convinced that NDA would form the Government and Mr. Narendra Modi would become the prime minister of India. Markets view coming of BJP-led NDA to power as a positive. So basically it's a hope rally. The prime ministerial candidate has an image of a 'doer' in the eyes of markets. Before you decide upon whether to go bullish on infrastructure again, you must thoroughly understand what are the factors that are driving the markets and why infra stocks are outperforming the broader markets.

If you closely look at the sectors which form the theme infrastructure, they are roads, bridges, ports, airports, warehouses, industrial erections and so on. And then there are other allied and integrated industries such as transportation, cement, construction and infra-financing institutions among others. This gives you an idea about how broad the theme could be. For past few years, bureaucracy and lack of political will had affected the progress of infrastructure companies at various levels. Moreover, due to higher interest rates and capital intensive nature of business, infrastructure companies were under pressure. But now, as markets believe, this could change had NDA formed the Government with a comfortable majority comes to power.

Aren't there any positives on the macro-economic front?
Yes there are. Current Account Deficit (CAD) which was the biggest worry uptil few months ago has shrunk substantially in the 3rd quarter of the current fiscal. CAD for the December quarter stood at just USD 4.2 billion. Rupee has remained firm and has appreciated against US dollar over last few months. Through a special swap facility provided by RBI, banks have already raised nearly USD 34 billion through FCNR (B) accounts. This has helped the country grow its forex reserves. There has been some respite on the inflation front too. Inflation measured by the movement of Consumer Price Index (CPI) dropped to 25-month low in February which came in at 8.10%.

But there are negatives too. Changing global landscape and concerns about India's fiscal deficits have been the major ones.

Would rally in Infra stocks continue post elections?
It would largely depend on the outcome of elections and magnitude of pre-election rally. If pre-election rally extends further and corporate earnings don't grow, markets would start looking expensive and then there would be a pressure on markets. Any unfavourable result in elections would trigger a panic sell-off in the markets and cyclical stocks may significantly underperform broader markets and defensives.

What investors should do at this juncture?
PersonalFN has been historically advocating investors to avoid sectorial and thematic funds. PersonalFN believes, although it may appear that they can help you generate superior returns, timing of entry and exit matters a lot. PersonalFN is of the view that, it is neither possible every time nor advisable to try timing the market. If you want to generate superior returns by taking advantage of opportunities present across various sectors and themes, you should consider investing in opportunities funds which are more diversified in nature. PersonalFN is of the view that at present, it would be wise to exit infrastructure funds and invest in equity diversified funds instead. In case you are still making losses on your investments in infra focused funds, it would be wise to book loses and switch to diversified funds. It is always important to balance between risk and returns. Current market rally in infra stocks might give you opportunity to cut your losses and move on.

Do you think Infrastructure as a theme will perform and reward investors? What is your take on Infrastructure theme? Share your views here. Or post your comments

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