India has got its act together over the last 12 months. Gone is the significant current account deficit, yet another coalition hotch potch government and double digit inflation. Last year, the rupee was one of the worst performing currencies, this year it’s on the up.
Most of this turnaround can be credited to one man – new Prime Minister Narendra Modi. Following the elections in April, Modi has led the first single party majority win in Indian politics in 30 years. Prior to Modi’s election bringing about reform in India was a complicated and inefficient process – a case of too many cooks spoiling the broth.
“The re-emergence of a single party rule is a political game changer for India,” said Deepak Lalwani, consultancy Lalcap which specialises in Indian investment.
“It allows a very good administrator and decisive implementer like Modi to shape and action policy without impediment by coalition partners.”
Modi also has form. In the 13 years as chief minister for Gujarat state, Modi averaged a GDP growth rate of 10%, and grew the agricultural sector more than 10% a year, every year.
His election manifesto was an agenda for change, growth and action and his supporters are confident that he will deliver the goods.
Barings India fund manager Ajay Argal says that the new government has started to tackle the key issues, putting the Indian stock market back on foreign investors’ radar.
“India is a large market and a large economy, with lots of opportunities,” said Argal.
“The previous government was slow to implement change and rocked by corruption. Modi has already combined the coal and power ministries to boost the energy sector, and is running the ministries like private businesses with monthly and quarterly goals to promote efficiency.”
Modi plans to continue the work of the previous government withdrawing subsidies on food and fuel and reducing market monopolies.
“Many of India’s problems are self-inflicted,” said Argal. “They are within this government’s power to change.”
Foreign investment will also help. During his time as chief minister for Gujarat Modi became cosy with the Japanese, thanks to many manufacturing in the state. Japan is now underwriting a major railway expansion in India, and extensive cooperation in planning manufacturing for defence.
“Japan certainly has what India needs - money, and India has what Japan needs - opportunities for investment, such as an enormous infrastructure deficit, but both of them also need support against a powerful and growing China,” explained Hermes head of Emerging Markets, Gary Greenberg.
“Modi’s inauguration – what the locals are calling his ‘coronation’ not only included the prime minister of Pakistan, but also the leaders of Bhutan, Nepal, Bangladesh and Sri Lanka.”
The outlook is not entirely rosy however. There are some concerns about inflation, which has been reduced to 8% - but is difficult to control.
Consumers have been hit by high inflation and high interest rates over the past two years, with much of the inflation being caused by food prices. There are worries that the El Nino effect – the band of hot air caused by oceans off South America – may make the monsoon season particularly aggressive, which in turn will have a further adverse effect on food prices.
Modi has been open about the long-term nature of his plans, but he will need every one of the 60 months he asked voters for during his campaign to modernise India.
“India's institutions were designed for central planning and these have never changed with changing times,” said Lalwani. “Indeed today the friction between the planning institutions and the free market economy has hit a crisis in taxation, regulatory practices, land acquisition, environmental clearances, financial sector development.”
What about the Stock Market?
The Indian stock market is almost entirely dependent on foreign investment, with less than 5% of the nation investing in equities.
Thanks to market volatility and a weak rupee last year, money piled into defensive stocks – sectors such as healthcare, energy, telecoms and consumer staple, meaning that these sectors now look overvalued on a relative and historical basis.
Instead, opportunities can be found in the cyclical sectors, says Argal.
“We are actively searching for ideas that are non-index,” he said. “Mid-caps look cheap, our focus is to be different from the consensus although we are aware that all markets and sectors are connected these days.”
He favours financials, consumer discretionary stocks and industrials.
