Baring Asset Management’s Ajay Argal says he has further raised his exposure to Indian cyclicals and mid-caps following the overwhelming election victory of Narendra Modi.
Even before the May 16 election, Argal, head of Indian equities and lead manager of the Baring India Fund, had an overweight to cyclical sectors such as financials (28.8%), consumer goods – discretionary (12.6%) and healthcare (11.8 %) on expectations of a revival in India’s economic growth.
After the election, Argal said he had boosted his cyclicals exposure further, increasing the fund’s overweight positions in both financials and industrials.
He told Citywire: ‘We are more positive on cyclicals as we believe these sectors will benefit when the economy picks up. It is a balanced bet on these sectors.’
The fund has also increased its weighting towards mid-caps, which Argal says ‘are still cheap compared with large caps’.
He believes that once the economy revives, mid-caps are likely to be re-rated as their earnings will grow faster and consequently, offer higher returns than large-caps.
It’s not all about the Modi effect: even before the elections, there were signs of the economy bottoming out, judging by indicators such as manufacturing PMI, monthly passenger and commercial vehicle sales and the addition of bad debts by banks.
Nevertheless, optimism has been growing among investors in recent months on expectations of Modi becoming India’s next prime minister, borne out by the repeated record highs hit by the Sensex and Nifty, the top two equity benchmark indices in the country.
A government led by Modi is expected to be more reform-minded and undertake desperately needed measures to slash red tape to ease business investments.
Even stubbornly high inflation and high interest rates are not expected to significantly dampen the outlook for Indian stocks.
‘Inflation has come down a bit but it won’t fall significantly as it has in some other markets in the region,’ Argal predicts.
The consumer price index – the most widely-watched inflation gauge in India – has been hovering around 8-9 % over the past few months. In continuing efforts to tame inflation, the Reserve Bank of India has held the benchmark interest rate, the repo rate, at a relatively high 8%.
Argal remains positive about financial stocks, which he says are less sensitive to interest rate rises than many think.
‘Liquidity is more important than the cost of money, or interest rate,’ he says. ‘It is not as if Indian companies will start more projects if interest rates are cut. They will do that when they have more confidence about demand, and when they are certain that government clearances will come through. It has very little to do with interest rates, unlike in the Western world.’
He adds: ‘India is one of the most underleveraged markets, so interest rates do not matter that much.’