· Elections and the taper do not matter much. These two most significant 'known unknowns' in 2014, in our view, will have limited impact on the economy and earnings. We find no correlation of growth with government fragmentation or its colour, and that India should be relatively immune to the taper. Both events may drive volatility given set expectations around their impact, but the market should revert to the trend soon after.
· Broad macroeconomic trends to continue. We expect the divergence in fortunes of large-scale investments and middle-income consumption on one hand and low-income consumption on the other to continue. The investment cycle is unlikely to pick up anytime soon, and middle income consumption growth is likely to stay subdued until the formal economy recovers, or until the 7th Pay Commission becomes effective. Growth in the informal economy though should continue to drive wage growth for the poor.
· Changing palette →market upside, but stay defensive. Indices have already started to reflect this divergence: consumption and exporters have gained weights from industrials, materials and banks. We are constructive on the broader market: (1) MSCI India P/E is ~15% below its adj. average, (2) consensus EPS has downside, but 6-8% index EPS growth is still likely. But our model portfolio is positioned defensively. Reliance, GCPL, HCLT and ITC are our top long ideas and L&T, Tata Steel and SBI our top shorts.
· Broad macroeconomic trends to continue. We expect the divergence in fortunes of large-scale investments and middle-income consumption on one hand and low-income consumption on the other to continue. The investment cycle is unlikely to pick up anytime soon, and middle income consumption growth is likely to stay subdued until the formal economy recovers, or until the 7th Pay Commission becomes effective. Growth in the informal economy though should continue to drive wage growth for the poor.
· Changing palette →market upside, but stay defensive. Indices have already started to reflect this divergence: consumption and exporters have gained weights from industrials, materials and banks. We are constructive on the broader market: (1) MSCI India P/E is ~15% below its adj. average, (2) consensus EPS has downside, but 6-8% index EPS growth is still likely. But our model portfolio is positioned defensively. Reliance, GCPL, HCLT and ITC are our top long ideas and L&T, Tata Steel and SBI our top shorts.
