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BJP performance in Karnataka good for India at this stage: Alastair Newton

India is a very good long-term story for investors, says Ala..

India is a very good long-term story for investors, says Alastair Newton, Alavan Business Advisory. Newton tells ET Now that irrespective of who ends up governing Karnataka, BJP emerging winner in terms of seats is actually a good thing for India at this stage.

Edited excerpts:

One of the big domestic triggers has been the election result in Karnataka. Will Narendra Modi, come good on his promise and form the government there? That is what the markets want. It indicates a continuity in reforms, else a fear of populism creeps in. Is that the consensus?

The markets are probably getting a little bit too concerned about this. One way or the other, the BJP does get the last laugh in Karnataka although they have not won an outright majority. They have effectively reduced the Congress Party to second place in a state which was Congress last major state of governance. So, even if Congress manages to retain the government with help of JDS, this a defeat for Congress and a clear victory for BJP.

It is a big win for Narendra Modi. Once again, he has proved himself to be a formidable election campaigner and although Rahul Gandhi by all accounts fought a very respectable campaign himself, it was clear that Congress did not campaign this election well. It does look to be in mess and at the moment it does not look like it is going to pose anything remotely resembling a real threat to BJPs governance in New Delhi come the general election next year. So, overall it is good news for BJP irrespective of what the actual outcome is in terms of governance of Karnataka.

The Indian markets have been very directionless of late. There may have been some stock specific action reacting to earnings, there may have been global cues at play, but it still remained directionless. It is almost as if all the market participants have assumed that Narendra Modi is here to stay. Would I be right in that reading?

You are probably right about that. I do think markets need to be a little bit cautious. There is a lot of historic evidence to suggest that regional elections taking place in the two years before general election are usually a pretty good indicator of how the general election is going to turn out. But let us keep in mind a couple of things here.

First of all, notwithstanding what I said earlier, Congress did actually win the popular vote over BJP in Karnataka, which again underlines how misguided a lot of Congress actual campaigning was relative to BJPs much tighter focus.

Second, the state elections which are taking place at end of this year, particularly in Rajasthan are really going to tell us about the likely outcome of the general election. Any judgement today about 2019 needs to be cautious, just as it needed to be after the Gujarat election at the end of last year where BJP managed to hold on despite Indias propensity for anti-incumbency.

External factors and more particularly dollar strengthening has taken a lot of investors by surprise. A lot were predicting a continuing dollar weakness. We are now seeing that going into reverse that may or may not last. I am not a currency expert. As far as the oil market is concerned, there are risk skewed to both sides of the current oil price. There is a trade war which could push it lower, events in the Middle East, leading to purchase premium. President of the United States, Donald Trump is driving this even though he chooses to blame OPEC. My personal view is that oil is more likely to go higher than lower for the rest of this year and clearly that is going to have an impact on sentiment over India.

Considering the run-up to 2019 and before that a lot of state elections, do you think Indian markets are going to be very volatile this year?

Volatility is back this year. We have all seen that and although markets have broadly calmed down relatively over the last five or six weeks, relative to some of the action we have seen earlier this year, politics — both international and domestic – is going to be significant drivers of renewed volatility periodically during the course of this year.

If anything, volatility is likely to increase and this is particularly important though in the context of yesterdays election result, it gives some reassurance to investors about India and Indias governance prospects in the medium term. This comes at a time when sentiment towards emerging markets is softening and the dollar is strengthening which is usually not good news for emerging markets. Irrespective of who ends up governing Karnataka, BJP emerging winner in terms of seats is actually a good thing for India at this stage.

What is happening in the global markets? The dollar strengthening, crude is continuously going up and irrespective of the earnings recovery, Indian markets are goinf to be fragile and volatile?

Rising crude prices are not good news for India and it does impact market sentiment. I would urge all investors to continue to focus on Indias fundamentals both political and economic and not get too distracted by external events. You cannot ignore the external factors but in the end, oil aside, India is more immune to exogenous factors driven notably by the Trump presidency than most emerging markets.

If we do see a general slump in EMs related sentiments, India will still stand out as a much better bet in the emerging market family. I am not just thinking about the obvious two; Turkey and Argentina, I am thinking about emerging markets collectively and as a whole.

You have already indicated that India may be insulated from a lot of the global external factors at play. Perhaps it is one of the better emerging markets out there but what about FIIs? Are we going to see a reallocation of portfolios towards emerging markets, especially when commodity markets are in an upcycle?

Let us put oil to one side for the moment and in general, there is an inverse relationship between dollar strength and commodity prices. When dollar goes up, commodity prices tend to go down. Oil is clearly running against that tendency but it is going to be interesting to see what happens in broader commodity markets over the coming weeks.

A former colleague of mine, James McCormack, who now works for Fitch, earlier this week postulated that if we continue to see a run of strengthening dollar, we are going to see some weakening of commodity markets. Generally, this is not good news for a lot of emerging markets but clearly that does not have a really big impact on sentiment over India. So, overall, there is a lot of uncertainty around at the moment about where commodity prices are going to go to as well. Clearly in the present geopolitical situation, there could quite easily be a negative impact on India because riskier assets are likely to suffer more.

But there could also be a positive impact in that India is increasingly seen as a relatively safe haven in a more volatile and uncertain times. And that is a sentiment with which I would tend to agree, given, of course, that right circumstances prevailing in India. What sort of monsoon we get this year is going to have a significant impact on investor sentiment over India as well as the politics and the general economic situation.

You do not foresee a reallocation of the FIIs portfolio particularly when the US is also on a better trajectory and making a recovery. Is it safe enough to continue with the kind of allocations that we have seen in the past?

Well, my personal view is yes, but I am not an equity strategist so I would strongly suggest that you talk to somebody who is more expert in these things than I am. I have always been reasonably bullish about India as you know, I see no reason to turn bearish on India today either for exogenous or for domestic reasons. It is a very good long-term story for investors. I do not see any need for investors to be alarmed or panicking about India right now. Overall, the trajectory going forward looks to me to be very positive indeed.

In consumption sector, what is the key space to be — domestic consumption, companies that will benefit from domestic growth irrespective of the crude price?

That is one area which is well worth continuing to look at but the difficulty is actually in finding stocks which represent real value investment prospects in India today. The stock market as you guys know is very well bought and if you can point out to me five or six stocks which represent really good value for money today, it would make me very happy indeed! I am sure it would make a lot of FIIs very happy if they could find those stocks.

The big problem seems to be that to a certain extent, India is well invested and finding value in the Indian stock market, real value is a tough task for a pro but the most experienced and close watching India investors. Obviously, there are those who are finding value or believe they are finding value but they are devoting a lot of time at the moment looking for that value, for a very positive market.

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