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The hurdle is high for Indian markets even if Modi wins again

Modi, or whoever wins power, must use the mandate to create jobs and fix the plumbing of the financial system, investors say.

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Sydney/ London: The bar is high for Asia’s most-popular destination of 2019 for overseas money even if Prime Minister Narendra Modi wins a second term in elections starting Thursday.

A survey of 21 global funds and strategists show most expect him to return, an outcome that may be baked into asset prices. With valuations already high, the disappointment if he fails to get a majority, needs to form another coalition — or loses the poll — may deflate the rally that’s made India the first among markets valued at more than a $1 trillion to hit a new peak this year.

“Numbers will matter as well as the degree to which he needs others to form a majority government,” said Maarten-Jan Bakkum, senior emerging markets strategist in the Hague at NN Investment Partners, which oversees about 246 billion euros ($277 billion). A Modi victory “should be good for markets, but the markets have probably priced it in,” he said.

Indian stocks have had an amazing run since Modi came to power in 2014 — the Sensex rose about four times as much as the MSCI Asia-Pacific, so the stakes are high. Shares trade at a 38 percent premium over Asia-Pacific peers as foreigners bought more than $7 billion of local shares so far this year, the most in the region.

Sentiment is also being aided by the Reserve Bank of India, which delivered the second rate cut of the year last week, and bullish views from brokerages including Goldman Sachs Group Inc. Even some local money managers who have been cautious are turning bullish, though domestic institutional investors yanked cash out ahead of the polls.

Modi’s strong response to the border situation with Pakistan appears to have boosted his popularity. On top of that, the Bharatiya Janata Party, which is leading in opinion polls, on Monday pledged to spend $1.44 trillion on infrastructure to boost the economy, in a bid to match its main rival’s populist promises. Election results are due on May 23.

Global funds’ optimism is not predicated on Modi victory alone as they say the underlying growth momentum and the broad political commitment to economic reforms will stay even if the opposition wrests power.

Investors say that Modi — or whoever wins power — must use the mandate to create jobs and fix the plumbing of the financial system. The much vaunted consumption engine is sputtering amid the aftershocks of the crisis in the shadow banking sector.

“While the government has produced reforms, I’d be looking for initiatives such as improving infrastructure and financial sector reforms,” said Claudia Calich, an emerging-market bond fund manager at M&G Ltd. in London.

Mixed Bag

Modi’s tenure has been a mix of big reforms including the introduction of a unified tax system, insolvency and bankruptcy rules and demonetization that struck at the heart of a largely cash-based economy but temporarily disrupted economic growth.

India’s equity valuation premium over its Asian peers will shrink if voters deliver an upset victory for the opposition.

“If the results are not constructive for investors, we will require a higher rate of return from our Indian positions,” said Ghadir Cooper, who manages $11.7 billion as global head of equities at Barings. “The government remains committed to structural reforms that would underpin the excitement we have in the earnings potential. If there’s a change in administration, we’ll look to see whether we require a higher rate of return.”

Here’s a snapshot of other views from the survey:

Rob Marshall-Lee, head of Emerging and Asian Pacific equities at Newton Investment Management

This has been one of, if not the, best governments in the world in the last few years. The Modi government has put in place numerous economic reforms, which will have positive consequences over a number of years to come. It is unlikely that a new government would fully unwind them.

Kieran Curtis, fund manager at Aberdeen Standard Investment

India has had a good run, so we are probably not likely to add. A loss by the BJP would require more analysis to see how much it changes the investment case, particularly since levels would likely be less attractive to sell at.
Jan Dehn, the head of research at Ashmore Group Plc in London

We might take some profits on a significant relief rally, but we are not a hedge fund and would still maintain a position if the outlook remains broadly unchanged. There are signs that the Modi government is beginning to use some of the same bad tricks as the former Congress administration. For example, putting doves on the central bank and recapitalizing airlines with state banks.

Kiran Nandra, senior product specialist, emerging markets at Pictet Asset Management

An unclear outcome might cause jitters in the market but we would treat temporary sell-offs as a buying opportunity. The long-term investment opportunity in India remains firmly in place, and we expect good-quality companies to continue to grow regardless of different election outcomes.
Eric Anderson, emerging-markets portfolio manager at Milltrust International

We are underweight India due to expensive valuations. On the positive side, the nation does have accommodative monetary conditions and a growth rate that is trending above the policy rate and inflation, all of which are positive for equities. I can certainly see us adding to our India exposure this year.

Also read: A $3.3 billion fund manager sees hung Parliament hurting stock market rally


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