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If salt loses its saltiness what will you season it with? –Luke 14:34

19 Mar 2019

STOCK MARKET--Sensex, SS2 and Modi. Are all three winners?/Read and understand.

Normally, the stock market gets nervous whenever there is a war-like situation. But not this time. More stocks have advanced as compared to the declining stocks since 14th Feb when the Fedayeen attack on CRPF in Pulwama killed 40 jawans. From BSE 500, only 83 stocks are trading at levels lower than those on 14th Feb. How one can explain this movement?

Normally, the stock market gets nervous whenever there is a war-like situation. But not this time. More stocks have advanced as compared to the declining stocks since 14th Feb when the Fedayeen attack on CRPF in Pulwama killed 40 jawans. From BSE 500, only 83 stocks are trading at levels lower than those on 14th Feb. How one can explain this movement?
Likely strong mandate for Modi
The stock market was fearing a fractured mandate in the coming general elections. That’s what pre-election surveys suggested. The market was concerned that a coalition government may not be able to push reforms, impacting long-term growth trajectory of the economy.
After the Pulwama attack, the way Modi government handled the situation suggests that Modi’s popularity is on the rise again. People now believe that the Modi government is walking the talk. It was the first time in many decades that Indian planes went inside Pakistan to carry out Surgical Strike 2 (SS2) on the terrorist camp. This has improved the sentiments as it showed that India is a strong country which would give a befitting reply to the terrorists’ dastardly attacks on Indian soil and that it is no longer a sitting duck.

The increased popularity of the Modi government means that the BJP’s as well as the NDA’s chances of forming the next government has increased manifold. At the same time, the so-called ‘Mahagathbandhan’ is not going anywhere. In AP, the TDP is all set to go alone. In UP, BSP and SP refused to go along with the Congress. In Rajasthan and MP, where the Congress has seen resurgence recently, the party is unlikely to form an alliance with the BSP and other regional parties, suggesting that there would be no direct fight between the BJP and the Congress. The resultant division of votes means better chances for the BJP and its allies. In Delhi, AAP has announced six candidates for Delhi, suggesting that it would be a three-way fight. In West Bengal, Mamata Banerjee is all set to go alone, while there is still no clarity on the CPM-Congress alliance for six Lok Sabha seats. That means there would be a four-way fight between TMC, BJP, CPM and Congress. One thing that looks more certain is that the BJP will improve its tally in West Bengal.
The best chance to beat Modi was a united opposition, but that’s not happening. On the other hand, despite the scathing attacks by the Shiv Sena against the BJP in the past, the party has buried the hatchet and joined hands with the BJP for the Lok Sabha election. In Bihar, the BJP would have allies in the form of JDU and LJP. In AP and Telangana, it looks like the BJP will get support from TRC and YSRCP. In Punjab, Akali Dal and BJP will fight together. In that sense, BJP has been able to work out its equations well with its allies as against the uncertainties surrounding the Mahagathbandhan.
Rahul Gandhi, on the other hand, is not able to spell out his vision for India. There is lack of clarity on his view on economic policy. He seems to be obsessed with the Rafale issue. His incessant rhetoric without any substantial proof of wrongdoings by the NDA may not cut ice with the electorate. The time has come for him to move on from Rafale and come out with stronger issues to take on Modi and his team. After the Pulwama attack, Rafale seems to be an urgent need for the country. Hence, irregularity or not, people want Rafale to make the country’s defence strong.
Rahul Gandhi’s plank for winning the election seems to be to announce more sops, but the moot question is, where would the funds come from? In a sense, the market is now sensing that Modi will have a smooth sailing.
Strong inflows from FPIs
The FPIs have also started pumping money into the Indian equity market post 14th Feb. They have pumped Rs 11,000 crore since the Pulwama attack. This is a good sign as the FPIs have been constant sellers in the Indian market for quite some time. It is too early to say whether this trend would continue, but what gives comfort is that the FPIs pumped in money when India was on the verge of a war with Pakistan.
This inflow assumes more significance as there was news for quite some time that the MSCI Emerging Markets index is due for a rejig, wherein China’s ‘A’ shares weightage would be increased, and due to that, India’s weightage would get reduced. Last Friday, MSCI did announce hiking China weightage of “A” shares. This would happen in three phases-May, August and November 2019. As per the note put up by Goldman Sachs, India’s weightage is likely to reduce by 20 basis points, resulting in outflow of $3.8 billion (active as well as passive). The outflows would be seen in large-caps, and not in mid-caps and small-caps.
I have been maintaining in the last two blogs that after the severe correction, the valuations of mid-caps and small-caps have become attractive. In my blog on 21st Feb, I wrote, “Many mid-cap and small-cap companies have seen their share prices taking a beating due to the poor market sentiments, thereby making their valuations attractive. These companies could present good buying opportunity for the long term, provided the promoters have no pledged shares and these are zero-debt companies. If these are high dividend yield stocks, then it would be like a cherry on the cake.”
I wrote again in my blog dated 27th Feb, “Many of the good quality mid-cap and small-cap stocks have taken a huge beating. Their valuations have become very attractive and yet investors are afraid of investing now. This fear is becoming their enemy. It’s time to fetch good quality mid-caps and small-caps with washtubs rather than with teaspoons.”
I am happy that mid-caps and small-caps are outperforming. Since Feb 20th, Sensex has moved up by 1.92 per cent, but the Midcap index has moved up by 5.73 per cent and the Small cap index by 8.62 per cent. We have not seen this kind of outperformance in the recent past.
I continue to maintain that mid-caps and small-caps would continue to outperform and, hence, it is still not late to board the bus. But you need to keep the criteria for selecting the companies strict as many poor-quality companies have also moved up.
Having said that, one should also expect volatility in the stock indices as the geopolitical situation can flare up as Modi seems to have not done with punishing the terrorists yet. He recently said, “A ‘pilot project’ is over. Now the real one has to be done. The earlier one was a practice,” suggesting that India’s fight against terrorism is far from over. One can expect more action from India, and Pakistan’s reaction to the same could impact the sentiments. Hence, the geopolitical events can create some nervousness.
But if you have a medium term outlook, I am confident that the mid-caps and small-caps will do well. Happier days are back for these stocks. Time to increase weightages of mid-caps and small-caps in your portfolio.

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