Global asset managers are still optimistic on India despite a market sell-off following Modi’s Bharatiya Janata Party’s (BJP) failure to win a widely expected landslide at the polls.
After initially hitting an all-time high on early indications of a sweeping BJP victory, Indian equities fell as much as 8% after a narrower than expected win.
Although some investors are questioning whether the pace and direction of the country’s economic reforms will continue, global asset managers are less phased by the potential policy uncertainty.
For Niraj Bhagwat, equity portfolio manager at Wellington Management, his base case for India is policy continuity. “We aren’t as bearish as yesterday’s moves suggest other market participants are,” he told FSA.
“Potentially there may be more money being distributed to the lower income households and the rural and farming communities – in practice a positive outcome for making India’s economic expansion more inclusive,” he said.
“We also don’t see any changes to the thrust for manufacturing and infrastructure, as there is very little opposition to these policies.”
He also pointed out that India has had a history of coalition/minority governments from 1989 to 2014, and in many cases with the main political party having far fewer seats than the BJP has today yet the coalition governments were still able to push through reform measures.
Indeed, the election outcome appears to be influenced more by local and non-economic issues, according to David Chao, global market strategist Asia Pacific ex-Japan at Invesco.
“This leads me to think that the planned reforms that have already been put in place – aren’t going to change,” he said. “I would expect that the focus remains on getting these reforms implemented and executed over the next five years rather than any policy pivot.”
High equity valuations
Despite this optimism around policy, Chao is relatively cautious on India’s equity market given its high valuation multiples and the uncertainty caused by the election result.
“The election results do raise some doubts over the notable premium of Indian equities earnings yields compared with 10-year India bond yields, which is why I continue to favour Indian bonds over equities,” he said.
Despite this preference, Chao said the equity market could still keep posting gains since domestic investors are likely to buy the current dip and foreign investors may view the recent sell-off as an entry point.
Domestic investors in India have been a growing force for the local equity markets as savings have shifted from bank deposits, gold and real estate into financial products.
Indeed, Trinh Nguyen, senior economist, emerging Asia at Natixis points out that Indian equities have been well supported by its local buyers and expects this to continue despite high valuations.
“One of the key reasons India is resilient is not just because there’s portfolio inflows, but there are more flows from the household, which takes money away from gold and deposits, that go into mutual funds,” she explained.
“I think that trend will increase if we have more formalisation of jobs because what that means is that they have to allocate to pensions, and pensions will become a key driver of the institutionalisation of India which will help anchor the market.”
“Indian equities remain supported and even more expensive than ever because of this increased buying by domestic investors, both on the retail side and the institutional side.”
A potential entry point for foreign institutions
In addition to domestic retail buyers, Julius Baer head of research Asia Mark Matthews said the recent sell-off in India could be “an entry opportunity to those who do not own it yet.”
“Unquestionably, changes made over the past ten years to the way that India is run have put the economy on a strong footing,” he said.
Although the market is concerned that fewer resources will be available to fund further infrastructure development and reforms may not get pushed through, Matthews also believes the BJP’s power despite being diluted, is “still intact”.
“Momentum in the economy from the existing reforms is still strong and will not fade away,” he said. “GDP’s growth in the January-March quarter at 7.8% y/y confirms an economic upcycle that we believe has several more years to go.”
Not all asset managers are quite as bullish however, Kunjal Gala, head of global emerging markets at Federated Hermes is underweight India due to the lack of margin of safety in valuations.
“Generally, companies that benefit from structural growth drivers (as opposed to government policy), with solid balance sheets and credible management, will do well, provided they are trading at reasonable valuations,” he said.
“We remain opportunistic and will assess companies in our inventory that we could not invest in the past due to high valuation as the situation becomes apparent on the political/macro front.”
He added: “Over the long term, reforms are crucial, and we are somewhat sceptical now that structural reforms in complex areas such as the farm sector and the Electricity Act will get done.”
However, a coalition led government is not something that the BJP government is unfamiliar with, as Kenneth Akintewe, head of Asian sovereign debt at abrdn points out.
“The start of the Bharatiya Janata Party’s (BJP) time in power was characterized by coalition politics, however they were still able to push through key reforms, so we would expect to continue to see India making progress,” he said.
“There is a risk of somewhat more populist policies. However fortunately on the fiscal side, the starting point is much stronger than expected fiscal performance and a structurally stronger fiscal position that provides important buffers, reinforced by larger transfers from the Reserve Bank of India to the government,” he added.
