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Modi returns, What next?

| Updated on May 27, 2019 Published on May 26, 2019

With the election frenzy dying down and the incumbent government winning comfortably, four fund managers share their views on how the various asset classes will fare during Modi’s second term

Multi-caps: Mid- small-caps can move up


The general elections have come and gone and in a few months, we will probably forget about all the hullabaloo around this. Share prices, ultimately, are slaves to corporate earnings.

Now, with a clear mandate to the NDA government once again, factors like crude oil prices, exchange rates, interest rates, credit quality of NBFCs, woes of airline companies and US-China trade war may be more important in estimating corporate profits than the general elections. The question now on every investor’s mind is: Which scheme/category of schemes do I choose?


Multi-cap schemes are usually appropriate for most investors. Multi-cap funds, in general, invest in companies in which fund managers see attractive opportunities, irrespective of their market capitalisation.

One may thus view multi-caps as ‘all-weather’ schemes that are flexible to serve the needs of both investors and fund managers. Sure, there may be times when the category will underperform compared to more focused categories, but this usually evens out over a cycle. Also, the flexibility innate in the scheme design often results in lower portfolio volatility.

Given that large-cap stocks have significantly outperformed small- and mid-cap companies over the past 15 months or so, there may be some merit in terms of expectations of a mean reversion. However, this strategy should be taken as a starting point for identifying good quality businesses available at attractive valuations.

Hoping for a broad-based market rally like in 2017 may lead to disappointment or even losses, if the wrong stocks are bought. There may be small stock-specific shifts in multi-cap fund portfolios, depending on reported profits or outlook, but there may not be any impact of the election result on fund strategies.

Investors need tofocus on goals, risk appetite and asset allocation. A 30-year-old will face at least six general elections till his retirement, and a lot of things that we obsess over in the short run mean revert over the course of time.

The writer is CIO PPFAS Mutual Fund

Mid-caps: Government spends to drive growth


Historically, small- and mid-cap indices have outperformed the large-cap index, except in a few exceptional years. Last year was unique, when the small- and mid-caps underperformed the large-caps due to factors such as lack of participation from FIIs, tepid earnings growth, as also the exit by HNIs, who were predominantly overexposed to the mid- and small-cap companies.

As a result of this, valuations too corrected and re-adjusted. Currently, the PE valuation for mid-caps and Nifty 50 is almost at par, which is against the trend, given that the potential for earnings growth is much better in smaller companies. Earnings growth in the midcap segment of the market would be driven purely by Government spending, targeted at driving consumption.


The next round of government spending will drive the SME and infrastructure segment. There could be further interest rate cuts in the upcoming monetary policies, which would help these companies tap low-cost rates. Ultimately, a combination of these two should ideally improve the earnings of these companies. The outperformance of small- and mid-caps could come back over the next 18 months. Sectors such as consumer durables, consumer discretionary, cement, pharmaceuticals, infrastructure space and auto ancillaries generally hold high potential to deliver better performance purely on the basis of market sentiment, demand and fundamentals of these companies. There are also firms in this space which operate in repeat sales or regular consumptions market. For example, tyre manufactures are witnessing almost 70-80 per cent of sales coming from the replacement market. Hence, the repetitive demand for these products also remain high.

The continuation of the current government and reforms will be a big plus for the midcap segment. As the government is taking necessary steps towards building a $5-trillion dollar economy over the next five to six years, naturally, the participation of mid- and small-cap companies has to be quite widespread. One must also note that, currently, the these stocks are not so widely discussed, analysed and are mostly ignored. Now is perhaps the best time to buy these stocks. Investors can allocate to mid- and small-caps with a considerable time-frame to reap the benefit of long-term investing.

The writer is CEO, Aditya Birla Sun Life AMC

Large-caps: Positives factored in


The incumbent government is back to power, ensuring continuity in decisive leadership, better policy predictability and reforms orientation. All these factors augur well for the economy and the capital market at large.

To begin with, sentiment is likely to be bolstered in terms of attracting foreign institutional investments into India. Within the emerging markets pack, on a year-to-date basis, India has attracted the most inflows at ₹66,287.93 crore. This trend is likely to continue. On the domestic front too, inflows into mutual funds via the SIP route will remain robust. The Indian mutual fund industry has a monthly SIP book of ₹8,238 crore (Data as on April 2019).

It can be observed from past instances that whenever the election outcome is favourable, there tends to be a short-term spurt in market returns. However, over the long term, the market seeks direction from macro-economic indicators, which highlight the overall health of the economy.


In terms of equity investing, one of the key differences between 2014 and 2019 is market valuation. In 2014, the market was cheap and going through a long phase of underperformance, which started around 2011. So, investing across market capitalisation was a possibility, given their attractive valuation. But that’s not the case now.

Today, the market is no longer cheap and, at the current price, most of the positives seem to be factored in. The Nifty price-to-earnings, currently at 29.02x, quotes at a 45 per cent premium when compared to its long-term average of nearly 20x.


Though there is value in PSUs compared to the premium valuation of the bellwether index, mid- and small-caps emerge as a better option. Equity accumulation by retail investors in mid- and small-caps should be done in a staggered manner via SIP/STP.

The other area of prime importance in the current market situation is adhering to asset allocation with adequate debt exposure.

This can be achieved by opting for asset allocation schemes. Owing to the expensive valuation, for those looking to invest in the market, asset allocation schemes could be a preferable option.

The writer is ED & CIO, ICICI Prudential AMC

Fixed Income: Opportunities across the curve


The one who wears the crown must bear its weight. In this case, it’s the weight of expectations that the market carries with the new government in place. The macros have mostly shaped up well in the last few years; yet, there are gaps that need to be addressed.

A low and stable inflation has created more room for policy easing. Policy transmission is even more critical, and the strengthening of public sector banks’ balance-sheet is needed for this.

Fiscal discipline must be maintained and debt supply absorption issues must be addressed by creating new streams of investor demand. Income growth and higher financial savings is the long-term solution, which needs more policy focus as well.

The debt market offers value across the duration and the yield curve right now. The immediate benefit of lower rates and better liquidity conditions will be felt across the yield curve, though it will initially be more pronounced at the shorter end (one to five years) and in the high grade (sovereign & AAA corporates) space.

Mean reverting moves aside, a medium to long-term constructive view on duration assets can be taken, once there is fiscal clarity.

Spread assets across the credit space look attractively priced right now, and there are many opportunities in both the high yield and structured space. These spreads may remain elevated in the near term, until issues such as issuer-related stress, business model-related changes in wholesale NBFCs and HFCs etc, play out.

Overall, high-grade short-term bond funds are the low-hanging fruits from an investor standpoint, both in terms of decent potential returns as well as higher visibility.

Credit risk funds offer good entry levels, given the elevated spreads, but need to be invested with a clear two to three-year time horizon, for some of the current issuer and sector-related issues to play out fully. Finally, the global and local macro environment may facilitate a good medium-term duration play, once there is clarity on the fiscal front.

Investors should decide the right option, based on time horizons, return expectations and risk appetite.

The writer is CIO-Fixed Income Investments, Reliance Nippon Life AMC

Published on May 26, 2019
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