India\u2019s economy has been on a rapid upward trajectory over the past few years, and according to a growing list of enthusiastic analysts, the future appears bright.<\/p>\n
Since the newly re-elected PM Narendra Modi first took up the top post back in May 2014, India\u2019s benchmark indices had grown by a little more than three times in value since Modi got the top job in May 2014.<\/p>\n
But it hasn\u2019t been plain sailing for Modi.<\/p>\n
Indian voters defied predictions, undermining the ongoing dominion of Modi\u2019s Bharatiya Janata Party (BJP).<\/p>\n
Modi\u2019s BJP is set to form government once again, but after securing some 240 seats on its own, it\u2019ll only be via the support of coalition partners in the NDA (National Democratic Alliance).<\/p>\n
\u201cObviously the early results trends are not positive for the markets. But to be sure, as long as the BJP\/NDA manages the 272 seats required to form the government, the drop will be only a short-term reaction overall,\u201d says Gaurav Dua, head of capital market strategy at the online broker and trading platform, Sharekhan.<\/p>\n
However, Mugunthan Siva of India Avenue believes it\u2019s important to recognise that \u2013 regardless of a governing majority or a coalition \u2013 the biggest driver of India\u2019s real GDP growth (which has averaged 6.2% over the past 40 years) is the country\u2019s demographics and underlying fundamentals, rather than makeup of the government.<\/p>\n
India is now the world\u2019s fifth largest economy, at close to US$3.9 trillion, trailing only the US ($29tn), China ($19tn), Germany ($4.6tn) and Japan ($4.1tn).<\/p>\n
And it\u2019s more than likely Delhi will surpass Berlin and Tokyo by the end of the decade, given it will be the world\u2019s fastest growing major economy this decade.<\/p>\n
With a burgeoning population, a dynamic and youthful workforce, and advancements in technology, India is poised for further transformative changes that will shape its economic and social landscape, says Anh Lu, VP at T. Rowe Price.<\/p>\n
Anh is also the lead portfolio manager for the firm\u2019s Asia ex-Japan Strategy.<\/p>\n
She says over the last few years India\u2019s stock market has followed the trajectory of its economy and has been one of Asia\u2019s best performing stock markets.<\/p>\n
\u201cWe think the country\u2019s prospects are bright. The challenge for us as investment professionals is centred largely around valuations.\u201d<\/p>\n
Certainly, with the gains flowing, investors are currently willing to pay a premium for Indian companies \u2013 the stock market\u2019s recent run has been led by the vibrant domestic, retail investor market.<\/p>\n
\u201cDue to reforms passed a few years ago targeting India\u2019s informal cash economy, we saw assets move into the financial system. In addition, the relatively high levels of inflation over the past couple of years have eroded the real return on cash deposits, and in turn have driven money into the stock market.\u201d<\/p>\n
For the first time, Anh notes, the domestic retail investors now own more of the market than foreign investors.<\/p>\n
And yet, again according to Mugunthan Siva, MD at India Avenue, investors globally are vastly underrepresented when it comes to exposure to India.<\/p>\n
The MSCI ACWI has a weighting of 1.7%, with most investors underweight India in their overall global equity exposure.<\/p>\n
Mugunthan says this has been largely driven by:<\/p>\n
1) An under exposure to Emerging Markets generally (which have been a failed asset class over the past 15 years).<\/p>\n
\u201cDespite India\u2019s significant outperformance of Emerging Markets, most allocators, researchers, and consultants still invest via broader buckets and hence their exposure is tainted by this thought process.\u201d<\/p>\n
2) India is seen as \u201cexpensive and volatile\u201d in nature as a standalone investment.<\/p>\n
3) A tendency of Western media to report only on only \u201cevents\u201d rather than the growth and development being achieved.<\/p>\n
However, Mugunthan also reckons that for an AUD domiciled investor, there are several reasons why a specific allocation to Indian equities makes sense from a portfolio perspective.<\/p>\n
\u00a0<\/p>\n
1) Indian equities low correlation to Australian Equities and Global Equities, relative to Emerging Markets.<\/p>\n
\u201cIndia is a net-commodity importer which is uniquely different to Emerging Markets like South Africa, Brazil, Saudi Arabia as well as Australia. Hence is currency having a low correlation to commodity fuelled currencies like AUD or the EM basket.<\/p>\n
\u201cIn fact, the INR\/USD has about half the volatility of AUD\/USD.\u201d<\/p>\n
2) India\u2019s Nominal GDP and EPS growth.<\/p>\n
\u201cGDP and EPS growth have correlation (unlikely many other Emerging Markets). Nominal GDP growth has averaged 11-12% in India over the century, which is roughly equivalent to 11% EPS growth over the period.\u201d<\/p>\n
\u00a0<\/p>\n
That said, India held its national elections over the last six weeks, with close to 650 million people heading to the polls, over seven phases.<\/p>\n
Mugunthan says their view is that the election results \u201cindicate the disparity which has emerged in terms of wealth in India\u201d.<\/p>\n
The bottom of the pyramid has endured a challenging existence pre-COVID and this was accentuated post-COVID. Rising unemployment in rural India and rising inflationary impact at the lower wealth segments have been lower on the priority list of the BJP majority driven Government.<\/p>\n
The number one priority has been a focus on capex\/infrastructure rather than populist measures (more synonymous with coalition governments in the past).<\/p>\n
The Nifty 50 has moved upwards by close to 25% over the last 12 months.<\/p>\n
\u00a0<\/p>\n\n
\u00a0<\/p>\n
The drop of close to 6% ahead of the polls trimmed off some of the expectations of a continued majority and exit-polls, partially unwinding the 3% rally incorporating added perceived risk of a coalition government in comparison to a majority going forward.<\/p>\n
\u201cOnce the dust settles over the next quarter, this will potentially make an attractive entry\/additional investment point,\u201d Siva told Stockhead.<\/p>\n
\u00a0<\/p>\n
\u2022 Fiscal consolidation path may take longer given the need for more populist measures. This may divert spending on capex\/reform initiatives<\/em> Via India Ave<\/em><\/p>\n \u00a0<\/p>\n Mugunthan says with India\u2019s economy recovering strongly after COVID, the best performing part of the stock market has been in the more cyclical areas, particularly in the small- and mid-cap space.<\/p>\n \u201cThis is where retail investor inflows have pushed the valuations of many stocks to record highs.<\/p>\n \u201cAs investment professionals, our job is to seek to uncover companies where their future prospects have not been fully appreciated by the stock market. Within the context of India being an expensive market, we find the most attractive opportunities today in blue chips, notably the banks.\u201d<\/p>\n He says these companies \u201coffer durable earnings growth potential and are trading on reasonable valuations, having been somewhat overlooked by the market.\u201d<\/p>\n \u201cBoth the India Avenue Equity Fund (IAEF) and India 2030 Fund (I30) are well placed to benefit \u2013 our stock selection has not been driven by Government Initiatives, but rather companies that benefit in the value chain of increased government spending and investment capex.<\/p>\n \u201cWe hold no exposure to PSU Banks and their rise over the last 3 years has been painful from an alpha perspective. It is likely that the \u201cvalue-trade\u201d has been played, with a switch now back to India\u2019s Private Banks, which offer higher ROE and are well placed relative to their long-term valuations.<\/p>\n \u201cWhilst we have increased our exposure to some Government owned businesses in the last 12 months, we are significantly underweight the Index weighting due to our general view that there are better allocators of capital available in the marketplace.<\/p>\n \u201cWe hold no exposure to Adani Group stocks, which have benefitted from the Government\u2019s focus on infrastructure projects and implementation. These stocks may take a breather.<\/p>\n \u201cWe are overweight in both Pharmaceuticals and Information Technology and as major export industries for India, with potential significant supply of jobs and rising market share globally, these industries are poised to deliver good results.\u201d<\/p>\n \u201cWe have exposure to companies which should benefit from a rural \u201crising\u201d i.e. Hero MotoCorp (2-wheelers) Kaveri Seeds, Coromandel (fertilisers), Bajaj Finance et al.\u201d<\/p>\n <\/span><\/p>\n The post Modi v3.0: Here\u2019s where investors can go shopping<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"
\n\u2022 Social, labour, land and agriculture reforms may also get delayed<\/em>
\n\u2022 Changes in policy on taxation, particularly long-term capital gain tax increases may be put on hold, which is positive for foreign investors<\/em>
\n\u2022 A shift from capex intensity to rural\/populist measures. Capex cycle will take a breather at least from the Government, with a hope that the private sector will add capacity given that utilisation levels have been rising<\/em>
\n\u2022 Public sector businesses which the Government planned to divest will be off the cards for now. PSU Banks who have re-rated significantly over the last three years will now take a breather<\/em>
\n\u2022 RBI to continue to maintain monetary tightness (no rate cuts) to deal with inflationary pressures on the ground<\/em>
\n\u2022 Union Budget to examine taxation with potential negative outcome in certain industries and more generically for equity markets if it relates to long-term CGT.<\/em>
\n\u2022 However, since the introduction of the GST and increased digitisation\/compliance, tax collections have been rising and the number of taxpayers has widened<\/em><\/p>\nWhere to shop<\/h2>\n