Indo-Pak tensions may have eased but fundamental problem remains weak GDP growth, says Mayuresh Joshi

What we have seen in the last few days is a clear de-escalation of tensions between the two nations. Both the nations really cannot afford a war at this point of time and the volatility has, in fact, been falling. It is evident in the India VIX, which fell sharply from 19.20 levels to 16.47 levels in 2 days. Of course, the VIX needs to come down below the 15-mark to actually give a semblance of stability to the markets. But, the risk of the border skirmish snowballing into a crisis may be behind us.

There are two things to keep in mind. Firstly, the war tensions may have de-escalated but at a fundamental level, there is the problem of weak GDP growth. A rate of 6.6 percent in the third quarter and 6.4 percent in the fourth is lower than what the markets were anticipating. That will be an overhang for cyclical sectors and for high elasticity sectors like banks, autos, and capital goods. However, the fundamental India demand story is still intact and one must look at consumption plays which are available at more compelling valuations.

Mid-cap stocks continue to be vulnerable to oil and exchange rates. As long as oil prices are above $60/barrel, mid-caps may face cost-pressures, though a lot of the other input cost variables are showing signs of stability giving respite to the operating performance that these companies might report in the coming quarters. Albeit, the sensitivity to earnings largely depends on the operating leverage that they can generate which is highly dependent on volume-led realisation growth coupled with the curtailment of input costs which creates strong earnings momentum. So, one needs to observe how these variables are consistently improving for a broader earnings recovery. The same applies to small caps also. One will have to be a lot more stock specific in the mid-cap arena and focus on quality stocks in the financial /consumption/speciality chemicals space where there are quality companies at reasonable valuations. Just buying into a price fall may not be a very good idea with respect to mid-caps.

We would still stick to financials including private banks/select NBFCs and consumption stocks, which are largely immune to the election outcome. Broadly, markets may be under pressure around elections because the government has already exceeded the full-year fiscal deficit targets. The interesting thing to note here shall be how the macro environment shapes up and how money supply/liquidity pans out in the system around elections which shall aptly get reflected by the yield curve. This movement on the yield curve should be a fair indication for the direction in which the equity markets might move.

Most microfinance companies have felt a hard squeeze in the last few months. Firstly, there has been a crisis of liquidity that has probably led to disbursements being slower and the cost curve moving higher which is invariably putting pressure on the spreads enjoyed by them. That is not good news for a sector that has relied on the comfort of spreads for long. Secondly, there might be tighter regulatory norms that can come through which might need tighter and stringent methodologies to be incorporated at the sector level. Stringent regulations have never been great news for this sector and one needs to adopt a wait and watch approach in this space considering all these developments.

It is hard to predict but it could depend more on the outcome of the elections and more precisely the outcome of the pre-polls and post-polls. This is in addition to the disruptions one might witness on the global macroeconomic front and the movement of crude which is also an important facet on dollar flows but how emerging economy currencies might react. So, in that respect, the volatility and gyrations in the equity markets might very well continue. However, the market would put a premium on stability and that will be the guiding principle for the market.