With elections looming in India, we look at the turning point for the region’s economy and where it could go in the future
Why we continue to see opportunities in India
After a wobbly start to 2019, India’s stock market has been on a bit of a tear since mid-February. This was boosted in mid-March after two opinion polls indicated that the incumbent Prime Minister Nerenda Modi would be re-elected following elections due to take place between 11th April and 19th May. Results are expected on 23rd May.
India is the most populous democracy in the world and is projected to overtake China by 2028 as the most populous nation on the planet. It is also the world’s 6th largest economy and, with its rising importance in global markets, I lay out below our reasons for why we continue to see opportunities in the region. I will look at the political change in India, the pro-business reform agenda being pushed by Prime Minister Modi and give some thoughts around the election.
Election - Battle of the purses
Modi is liked and disliked in equal measure in India and since coming to power has been inconsistent in delivering on his promises. Modi has though, marketed himself as a strong leader with a determined focus on eliminating corruption and boosting the economy.
The main opposition Congress Party are, at the time of writing, in the throes of finalising their election strategy. However, their main challenge will be exposing the chinks in Modi’s brand and impressive, cash-rich election machinery at a time when it has been widely reported the opposition are facing financial challenges. A more notable challenge when the election is being billed as one of the world’s most expensive. The New Delhi-based Centre for Media Studies projects the cost of the election at around $7billion. To put that into context, the US election cost $6.5 billion according to OpenSecrets.org, as reported in The Economic Times.
Optimism was high in March 2017 when regional elections were more pro-Modi than many were expecting. This potentially increased the chances of his government taking a second term comfortably when elections take place in 2019. However, this assumption was challenged in 2018 when two regional elections saw the BJP suffer heavy defeats. The regions are Hindi heartlands where Indian governments are traditionally won or retired.
The changing face of India
The election of Narendra Modi in May 2014 was a turning point in India’s economic fortunes and its position on the global stage. Modi’s government has been focused on a pro-business reform agenda. The progress his leadership has made was recently acknowledged by the ratings agency Moody’s when it upgraded the country’s local and foreign currency sovereign ratings to Baa2 up from Baa3 and elevated its outlook to ‘stable’.
Other significant government policies have seen the rollout of the Goods and Services Tax (GST) to help unify one of the world’s most convoluted tax regimes and anti-corruption measures, which involved the removal of high value banknotes from circulation to help boost tax receipts and support the move to a digital economy.
Under Modi GDP growth has been recovering, which over time should contribute to a reduction in government debt. There has also been a pickup in corporate earnings. All of which has seen it moving up into the top 100 regions worldwide for ease of doing business, up from 142 when Modi took power, with the outlook still encouraging.
Other long-term factors of note
- Population growth and a high proportion of the population being of working age are good news for the economy. India boasts one of the most enviable demographic profiles of the world’s major economies.
- A growing, educated middle class that is becoming more affluent is likely to drive demand for goods and services.
- Inflation has been falling helped by a steadying of the price of oil around $60. Over the long-term, lower inflation should be supportive of consumer borrowing power giving an additional boost to demand.
- The government has been targeting projects to improve infrastructure, support the rural economy, promote small and medium size enterprises and focus on fiscal consolidation, which should be a catalyst for long-term sustainable growth.
- Introduction of GST overtime should help India navigate its way out of its trade deficit into an export-led growth economy.
- India still has a number of hurdles to jump to elevate more people off of the poverty line, requiring large investments for improving health, education, transport, telecommunications, energy and utilities.
India as an investment destination
A number of factors are converging that have been giving India prominence on the global economic stage. This includes high growth rates in the industrial and service sectors, significant population growth, strong domestic demand, as well as a Government that is pro-business. This mix, in our eyes, subsequently makes the country hard to ignore as a long-term investment opportunity. The International Monetary Fund (IMF) currently projects India’s growth to accelerate in 2020 and 2021 to 7.5% and 7.7% respectively, which potentially positions it as the fastest growing major economy in the world.
Whichever party win these elections, investors will be keen to see that there is a continuation of policies that seek to boost spending and productivity and not to get distracted by populist measures. India has a good investment story around infrastructure investment, consumption and reforms. Post the election fundamentals should take over but until then volatility in Indian stocks could be heightened.
Provided that the elected government of the day is pro-business and pro-reform it may not immediately matter who wins given all the longer term attributes investors can access by investing in India. However, if recent polls and market reaction are anything to go by anything other than a strong performance by Modi’s BJP could see a near-term setback in its stock market post the election.
Funds and an investment trust you may want to consider if you are thinking about an investment in the region are:
Jupiter India the manager’s style of investment is very much identifying companies on the strengths of their fundamentals. He principally uses a process referred to as a GARP measure (Growth at a Reasonable Price). However, if an opportunity exists, he will be prepared to pay a premium if the earnings growth compensates for this. The manager invests across the capitalization scale.
Goldman Sachs India Equity Portfolio The management investment philosophy resides in seeking strong returns that they believe are earned over time by investing in sound business at a substantial discount to intrinsic value. Management execution capabilities tend to favour companies that are in the mid and small-cap spectrum.
JPMorgan India Investment Trust the trust, which was launched in 1994, aims to provide capital growth from a diversified portfolio of Indian investments. It is managed by Rajendra Nair and Rukhshad Shroff who have a dedicated team within a 75-strong pacific regional group. They focus on company visits and research to discover attractively-valued stocks. For a single country fund it is relatively large, with a market cap of around £780 million. The trust can use gearing of up to 15% of net assets.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.