"Local Triggers to Drive Indian Markets"

Clinton or Trump...who is it going to be? That seems to be the question on everybody's mind. With US elections a fortnight away, all eyes and ears seem to be glued to the media bytes from that part of the globe. Its impact on the Indian markets, however, is likely to be limited. The likelihood of a Fed rate hike in December has also been gradually factored in.

The drivers for our equity market are far more domestic. Effects of a good monsoon have already started trickling in. The September inflation came in at 4.3 per cent, the lowest since August 2015. The Reserve Bank of India has decidedly become more dovish. The Monetary Policy Committee announced a 25 basis points rate cut. It is expected to move again before the end of the financial year.

The government, on its part, is making all the right moves. Apart from the thrust given to the infrastructure sector to promote growth, it is actively undertaking several reforms that are going to pay off in the long run. The goods and services tax, or GST, in particular, was a battle won after months of laboured negotiations with the states and the opposition parties. It will result in simplification of the tax administration and ensure better compliance, boosting revenue collections. In a World Bank report, India's ranking in terms of Ease of Doing Business jumped up significantly. The country's image is undergoing a major transformation, giving foreign investors confidence and reason to participate in the country's growth.

The major spoke in the wheel at this point of time is the lack of private capex. While public investment grew a record 21 per cent year-on-year in 2015/16, private investment has been relatively stagnant. This has been mirrored in the quarterly results seen so far.

Sectorally, we are positive on the domestic consumption story. With the implementation of the 7th Pay Commission recommendations, we expect higher disposable incomes to increase urban discretionary spending on automobiles, white goods, etc. Growth in rural incomes as a result of good rains is likely to benefit FMCG, tractor, two-wheeler and a host of agri-based companies. Cement is also expected to do well; here, we are not seeing volume growth, but margins are improving.

In financials, the non-performing assets, or NPAs, seem to have bottomed out. Some companies have started selling off assets to settle loans, though the clean-up process is gradual and likely to take time. We are optimistic on select retail banks and NBFCs.

The IT sector has been under a lot of pressure for several quarters now. However, it has some of India's finest companies in terms of corporate governance and we would not dismiss them entirely. Metals have had a great run this year, and we don't expect any significant upside from here.

While valuations may be stretched in certain stocks and sectors and the outlook may be muted in the near term, we urge investors to have a longer horizon. We expect significant flows into the Indian equity markets over the next couple of years. Equity is an asset class that nobody, repeat nobody, can afford to ignore anymore.