---
title: "Brace for Election Volatility: A 32-Year GDP Record Says It Will Be Short-Lived | Quarterly Newsletter - September 2023 / Q2 FY24"
period: "Q2 FY24"
published: 2023-10-31
modified: 2023-10-31
url: https://equitreecapital.com/insights/newsletters/september-2023
markdown: https://equitreecapital.com/insights/newsletters/september-2023.md
authors: ["Pawan Bharaddia", "Ssuneet Kabra"]
publisher: "Equitree Capital Advisors Private Limited"
language: en-IN
---

# Brace for Election Volatility: A 32-Year GDP Record Says It Will Be Short-Lived

Quarterly Newsletter, September 2023 / Q2 FY24. Published 31 October 2023 by Equitree Capital. About 13 minutes to read. Web version: https://equitreecapital.com/insights/newsletters/september-2023

> Quarterly Newsletter published 31 October 2023. Figures are as of the dates stated in the letter and are not updated after publication.
> Performance data has not been verified by SEBI. Past performance is not indicative of future returns.
> Current performance, with its as-of date and benchmark: https://equitreecapital.com/pms
> Performance relative to other portfolio managers in the same strategy: APMI, https://www.apmiindia.org/apmi/IaInsight.htm?IAID=407
> Not investment advice, an offer or a solicitation.

> The most important quality for an investor is temperament, not intellect.
>
> Warren Buffett

Dear Investors,

Our reckoning — *“this market has still much more steam left — still time to build cautiously rather than thinking exit”* — that we had mentioned in our **[Q1 FY24 newsletter](https://equitreecapital.com/insights/newsletters/june-2023)** played out perfectly. After a super performance in Q1 FY24, our portfolio saw a continued outperformance during Q2, **delivering 20.55% return as against a mere 5.49% from the benchmark index**[1].

## Our Performance

| Investment Period | 1 Month | 3 Months | 6 Months | 1 Year | 2 Year | 3 Year |
| --- | :---: | :---: | :---: | :---: | :---: | :---: |
| Emerging Opportunities | -2.85 | 15.06 | 65.80 | 47.41 | 29.85 | 52.12 |
| BSE 500 TRI | 2.11 | 5.49 | 19.39 | 17.48 | 12.47 | 24.28 |
| Outperformance | -4.96 | 9.57 | 46.41 | 29.93 | 17.38 | 27.84 |

As of September 30, 2023. Returns are computed on a TWRR basis, net of fees & expenses, and not verified by any regulatory authority/SEBI.  
Returns over one year are annualized. Benchmark changed from Nifty Smallcap 100 to BSE 500 TRI vide SEBI circular no SEBI/HO/IMD-PoD-2/CIR/2022/172 dated 16 December 2022.  
Source: Nuvama Custodian Services, Equitree Capital[1].

Last month some of our portfolio companies saw a bit of consolidation after a significant run-up post Q1, resulting in marginal underperformance on a monthly basis.

Despite this outperformance, **valuation of our portfolio companies continues to be in a very comfortable zone — trading at ~16× FY25 PAT**. This still leaves enough room for further upside and gives us comfort and conviction not only to hold on to the portfolio, but to add more even at these levels.

> **Takeaway:** Eyes on the ground, value lens on. We are sitting on **~12% cash on an overall basis** — waiting to leverage the opportunities that the expected volatility may throw up. *In the recent fall, we deployed nearly 25% of the cash that we were holding at ~10% lower prices.*

## 01. Brace Up for Some Volatility Ahead

While the portfolio still has significant upside, we are also cognizant of the upcoming volatility that may hit the markets on account of profit booking as Q2 earnings come about, as well as the **ongoing global issues — Israel-Gaza war, Ukraine-Russia conflict, rising Dollar index, increasing bond yields, and the expected longer regime of higher interest rates**. We have been extremely cautious in deploying funds.

For example, we grabbed the recent fall in the market — a brief window to deploy capital at ~10% lower prices — and **deployed nearly 25% of the cash we were holding**. We are sure we will get more such opportunities to judiciously deploy capital in our chosen businesses.

Some of these global events have been around for a while and have been discounted in prices too — nevertheless, they will keep bringing intermittent volatility. **In our opinion, the mother of volatility from an Indian-market perspective will be the national elections coming up early next year.** We share our views on the same:

## 02. Upcoming Elections — Short-Term Rollercoaster, Neutral Long-Term

From investors to traders, from retail to institutions, everyone alike has been discussing the upcoming general elections and the potential market impact. **Morgan Stanley’s recent report summed it up well, presenting four different scenarios with a range of +5% to -40% impact** depending on the outcome[2]. Even in the best-case scenario, they speak of only a 5% positive impact, with downside up to 40% in case of a weak coalition.

We are not crystal gazers to predict the outcome — but take a much more pragmatic view based on **on-ground assessment of the business environment**.

> **Takeaway:** Undoubtedly a weaker coalition will impact India’s positioning in the global rankings. **However, the strong macro fundamentals and policies already implemented over the last couple of years will continue to steer India’s growth irrespective of the outcome — they cannot be undone, even by a weak coalition.**

### 2A. The Policy Stack That Has Already Locked In Growth

We enumerate some of the most important policies / actions implemented over the last couple of years that have laid a strong foundation for India’s economic growth:

#### Banking Cleanup

Post the IL&FS fiasco in 2018, the government went on a spree to clean up long-drawn NPAs in the books of financial institutions. **Gross NPAs declined from a peak of 14.6% in March ’18 to 5.53% in December ’22**, while resilience increased — **provision coverage ratio (PCR) of PSBs rose from 46% to 89.9%**[3]. *Banks are the backbone of any economy; healthier balance sheets provide the stimulus required for consistent growth.*

#### Digitisation of the Economy

Right from demonetisation in 2016, the government has digitised the economy. Most government benefits / subsidies — PMJDY, PMJJBY, APY — are now transferred directly to end beneficiaries, cutting the red tape between.

| Indicator | Value |
| --- | ---: |
| PMJDY accounts (March 2015) | 14.72 cr |
| PMJDY accounts (August 16, 2023) | 50.09 cr |
| Total deposit balances under PMJDY | ₹2,03,505 cr |
| Government savings under DBT (FY22 alone) | > ₹50,000 cr |

PMJDY accounts and Direct Benefit Transfer savings since 2015. Source: PIB; Ministry of Finance[4].

#### PLI / Make in India

PLI Schemes have transformed India’s exports basket from traditional commodities to **high-value-added products** — electronics & telecom goods, processed food products, etc. **176 MSMEs are among the PLI beneficiaries** across Bulk Drugs, Medical Devices, Pharma, Telecom, White Goods, Food Processing, Textiles & Drones.

| Indicator | Value (till Mar 2023) |
| --- | ---: |
| Actual investment realised | ₹62,500 cr |
| Incremental production / sales | > ₹6.75 lakh cr |
| Direct employment generated | ~3,25,000 |
| Exports boosted | ₹2.56 lakh cr |
| Approved applications across 14 sectors | 733 |
| Expected investment over the next couple of years | ₹3.65 lakh cr |

PLI scheme impact till March 2023, with FY24 onward pipeline. Source: Ministry of Commerce; PIB[5].

#### GST Implementation

India’s erstwhile complex indirect-tax regime — with states levying diverse taxes — gave way in 2017 to **“One Country, One Tax”**. This brought ease of multi-state operations, while tighter enforcement also brought a lot of unorganised *“cash economy”* into the mainstream. The impact: **GST collection of ₹1,62,712 crore in September 2023 — the highest monthly collection ever**[6].

#### Free Trade Agreements (FTAs)

With a view to strengthen India’s role in global trade, the government has been on a spree to sign FTAs. India has already signed FTAs with **Japan, Australia, Chile, Singapore, Sri Lanka**, and is in advanced stages of negotiations to sign its **first FTA with one of the top 5 economies of the world — the UK**. These FTAs contribute roughly **30% to India’s merchandise exports**, and the share is expected to rise[7].

## 03. If History Rhymes, One Doesn’t Need to Be Much Worried

We looked at how the Indian economy has fared over the years across different regimes. **The economy at large has taken its own stride despite multiple swings at the power centre in Delhi**:

| Year | GDP Growth (%) | Year | GDP Growth (%) |
| --- | :---: | --- | :---: |
| 1991 | 1.10 | 2008 | 3.90 |
| 1992 | 5.50 | 2009 | 8.50 |
| 1993 | 4.80 | 2010 | 10.30 |
| 1994 | 6.70 | 2011 | 6.60 |
| 1995 | 7.60 | 2012 | 5.50 |
| 1996 | 7.60 | 2013 | 6.40 |
| 1997 | 4.10 | 2014 | 7.40 |
| 1998 | 6.20 | 2015 | 8.00 |
| 1999 | 8.50 | 2016 | 8.30 |
| 2000 | 4.00 | 2017 | 6.80 |
| 2001 | 4.90 | 2018 | 6.50 |
| 2002 | 3.90 | 2019 | 3.90 |
| 2003 | 7.90 | 2020 | -5.80 |
| 2004 | 7.80 | 2021 | 9.10 |
| 2005 | 9.30 | 2022 | 7.20 |
| 2006 | 9.30 | 2023 | 6.50 |
| 2007 | 9.80 | 32-yr Average | 6.31 |

India real GDP growth, 1991–2023 (32-year record). 32-year average: 6.31%. Source: RBI; MoSPI; Equitree Capital[8].

> **In Focus:** **Over the last 32 years, the Indian economy has grown at an average of 6.31%** — irrespective of which party was in power, or whether the government was a majority or coalition. **Even during the weakest coalition phase of 1996–1998, where India saw 3 Prime Ministers in a 2-year regime, the economy still grew at an average of 5.15%.**

Likewise, we looked at market returns over the same period. **The headline index has given a 13.46% CAGR over 32 years despite all challenges and volatility** — and even during the weakest coalition government of 1996–98 the index was flattish at best:

| Lok Sabha<br>Year | Nature of<br>Govt. | Prime Minister | 6-mo Pre-Election<br>Returns (%) | During Tenure<br>Returns (%) |
| :---: | --- | --- | :---: | :---: |
| 1991 | Majority | PV Narasimha Rao | 31.50 | 24.50 |
| 1996 | Coalition | Shri Atal Bihari Vajpayee | 21.63 | -2.46 |
| 1996–1997 | Coalition | Shri H.D. Deve Gowda | 25.05 | 2.01 |
| 1997–1998 | Coalition | Shri Inder Kumar Gujral | 17.74 | 0.55 |
| 1998 | Coalition | Shri Atal Bihari Vajpayee | -0.11 | 4.32 |
| 2004 | Coalition | Dr. Manmohan Singh | 2.89 | 22.90 |
| 2009 | Coalition | Dr. Manmohan Singh | 60.04 | 12.18 |
| 2014 | Majority | Shri Narendra Modi | 21.01 | 10.02 |
| 2019* | Majority | Shri Narendra Modi | 10.10 | 11.18 |

Market returns across the last 9 Lok Sabha cycles — 6-month pre-election returns vs returns during service tenure (CAGR / IRR). Source: BSE Market Data; Equitree Capital[9].

> **Takeaway:** Given that we have had a decent run-up going into the elections, expecting **a sharp volatility may not be out of context** — but looking at the strong economic setup and going by history, we believe that **if such volatility indeed comes about, it may just be short-lived and present a significant wealth-creation opportunity from a long-term perspective**.

## How We’re Playing This

> Market fluctuations are your friend, not your enemy.
>
> Warren Buffett

## 04. How Are We Preparing to Play This Out

As investors in businesses, we have our eyes set on the ground in terms of assessing the visibility of growth for our portfolio companies. Equally, we have our **“value” lens on** to focus on booking profits where valuations seem to be getting stretched — we have indeed booked profits in some of our holdings and **redeployed cash in other interesting opportunities**.

> **Takeaway:** **Like a polar bear who doesn’t spend too much effort fishing every now and then, but rather waits for his opportunity to grab his big pound of catch — we keep judiciously looking for the right opportunity to deploy capital.** Our strategy of building up the portfolio in a staggered manner has been a cornerstone of our outperformance over the last 3 years.

We firmly believe that **India is on a strong footing for multi-year growth** and continue to keep looking for good businesses available at reasonable valuations. *One just needs to be ready with the investible corpus to leverage these opportunities, rather than getting caught in the clutter of noise every now and then.*

We also take this opportunity to wish all of you a very **Happy Diwali and a Prosperous New Year ahead**. For any feedback or queries, please [reach out to us](https://equitreecapital.com/contact).

Warm regards,

Team Equitree

- Pawan Bharaddia, Co-Founder & CIO (pawan.b@equitreecapital.com)
- Ssuneet Kabra, Co-Founder & CEO (skabra@equitreecapital.com)

## Sources

1. Nuvama Custodian Services; Equitree Capital internal performance and NAV records (September 30, 2023). Returns are TWRR, net of fees and expenses, and not verified by any regulatory authority/SEBI.
2. Morgan Stanley — Pre-2024 election scenario analysis with a range of +5% to -40% market impact across four outcome scenarios.
3. Reserve Bank of India; Financial Stability Report — Gross NPA decline (March 2018: 14.6%; December 2022: 5.53%); PSB provision coverage ratio (46% to 89.9%).
4. Press Information Bureau (PIB); Ministry of Finance — PMJDY accounts (14.72 cr in March 2015 → 50.09 cr by August 16, 2023); ₹2,03,505 cr in PMJDY deposits; > ₹50,000 cr saved under DBT in FY22 alone.
5. Ministry of Commerce; PIB — PLI scheme aggregate data till March 2023: ₹62,500 cr investment, > ₹6.75 lakh cr production, ~3,25,000 employment, ₹2.56 lakh cr exports; 733 approved applications across 14 sectors with ₹3.65 lakh cr expected investment.
6. Ministry of Finance — GST collection of ₹1,62,712 cr in September 2023 (record monthly collection at the time).
7. Ministry of Commerce — Free Trade Agreements signed with Japan, Australia, Chile, Singapore, Sri Lanka; UK FTA in advanced negotiation; FTAs contribute ~30% of India’s merchandise exports.
8. Wikipedia (compiled from RBI / MoSPI); Equitree Capital — India real GDP growth 1991–2023 (32-year average 6.31%; 1996–1998 weakest-coalition average 5.15%).
9. BSE Market Data; Equitree Capital — Sensex returns 6 months pre-election and CAGR / IRR during service tenure across 9 Lok Sabha cycles (1991–2019).

## Disclaimer

This newsletter is prepared by Equitree Capital for informational purposes only and is directed at existing investors of its Portfolio Management Services. It does not constitute investment advice, an offer, or a solicitation to buy or sell any securities.

Past performance is not indicative of future results. Returns are computed on a TWRR basis, net of fees and expenses, and are not verified by any regulatory authority. Individual portfolio performances may vary. Forward-looking statements are subject to risks and assumptions that may not materialise.

Investments in small- and micro-cap equities carry higher volatility, liquidity, and business-specific risks, including the possible loss of principal. Equitree Capital is a SEBI-registered Portfolio Manager. Recipients should consult their independent financial, legal, and tax advisors before making any investment decisions.

This document is private and confidential. It may not be reproduced, redistributed, or published, in whole or in part, without the prior written consent of Equitree Capital.