In a move that would benefit close to one crore government employee and pensioners, the government has approved recommendations of the Seventh Pay Commission in which a hike of 23.5% has been recommended with effect from January 1, 2016.
Simply put, central government employees will get arrears and receive a fat pay hike. When people have more money at their disposal, this will increase the overall consumption in the economy.
So how does this event impact Indian stock markets and what should investors do at this juncture? We spoke to a few fund managers to understand what they make out of this event.
Investors should look at increasing exposure in funds which invest in consumer durables
Mahesh Patil, Co-Chief Investment Officer, Birla Sun Life Mutual Fund believes that investors should look at increasing exposure in funds which invest in consumer discretionary and consumer durable sectors to gain the most out of implementation of Seventh Pay Commission.
Patil said, “Market has already factored-in Seventh Pay Commission implementation. The move will benefit sectors like consumer discretionary, automobiles and consumer durables. People may spend on air-conditioners, automobiles, footwear and apparel. This will help grow consumer credit and eventually help NBFCs too.”
Increase exposure in multi-cap equity funds
Gopal Agrawal, CIO, Mirae Asset MF is of the view that implementation of Seventh Pay Commission would add 45 bps to India’s GDP growth over the next three years. “Though state governments may take around two years to implement the recommendations of Seventh Pay Commission, it would add 45bps to GDP growth over the next three years due to the boost in consumption.”
“Further, government will have to bear the burden of 2% of GDP as a result of the pay hike. That means, consumption will grow. From electrics to home appliances, we will see a demand push in consumer discretionary space. A lot of mid and small companies are dealing in the consumer discretionary space.” He recommends investors to stick to multi cap funds instead of investing in consumption based thematic funds.”
Good time to increase exposure in diversified equity funds
S N Lahiri, CIO, L&T Mutual Fund, feels that Seventh Pay Commission would not lead to a spike in inflation. “Unlike the last two pay commission implementations, this time, the corporates have already factored in the implementation of this event. Also, state governments would take at least two years to implement these recommendations. Hence, there is an enough room for corporates to deal with this demand hike.”
Lahiri too believes that consumer discretionary sector will benefit the most. “Consumer discretionary segments like two wheelers, four wheelers, paints, cement, furniture and housing finance will see a boost. The leaders of these sectors are spread over various market capitalizations. Hence, it is advisable for investors to invest in diversified equity funds and multi-cap funds to cash in on this opportunity.”
Invest in a fund having a quality portfolio
V. Balasubramanian, Vice President (Head - Equity), IDBI MF, believes that implementation of pay commission recommendation coupled with prospects of good monsoon will benefit equity markets. He said the only concern is fiscal deficit. “Government will have to see how they can manage to meet the fiscal deficit target with this additional burden.”
He further said, “Whenever people get money, they tend to invest in goods and services which improves their standard of living. Companies involved in producing paints, cement, ceramics, four wheelers, electronic goods will see boost in consumption. ”
He suggests investors to increase exposure to funds having quality portfolios. “It’s not that large cap or mid-caps would perform better than any other funds. I believe any fund with a quality portfolio will help investors create wealth.”
