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Investors Sanguine As India Election Cycle Starts

Tom Burroughes, Group Editor , 15 April 2019

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The world's biggest democracy goes to vote and wealth managers appear - for now - relaxed about the likely result, to be announced in a week's time.

With about 900 million eligible voters able to decide the outcome of India’s national elections, which are now under way, speculation is rife as to whether the incumbent government, led by BJP leader Narendra Modi, will retain office. The government has been associated with economic reforms, including a controversial move to outlaw high-value banknotes and squeeze the underground economy.

Voting goes ahead in stages, culminating in a scheduled result announcement on 23 April. 

"We remain positive on the structural growth story on India and the dynamic (and favourable) investment opportunities available," Prashant Kothari, manager of the Pictet-Indian equities fund, said. 

"We are long-term investors in the India equity market and, as such, are fully invested in the country. Pictet’s Asia ex Japan strategy, which had been underweight India over the medium term, has now moved overweight in light of attractive valuations,” Kothari continued. 

“Many reforms that have been enacted are deep-rooted and unlikely to be rolled back, these include the bankruptcy code, GST reform and Direct Benefits Transfer. We are positive on the structural growth story on India and see an increased opportunity set within the asset class moving forward,” Kothari said.

India’s economy felt some of the chill winds that have bruised emerging market economies over the past year, caused to some degree by expectations that higher US interest rates will raise global borrowing costs. However, India’s equity market, as measured by the MSCI India Index, fared less badly than some: down by 7.3 per cent in 2018. The MSCI Emerging Market Index fell by more than 5.0 per cent.

“We believe that receding political risks will be good for Indian equities. One of our key routes to Indian exposure is via an active manager, which has a natural skew towards mid-sized companies where active managers typically find most of their opportunities. Having underperformed their larger counterparts since early 2018, the share price valuations of these mid-sized businesses are relatively cheap when set against the wider Indian market,” Jaisal Pastakia, investment manager at UK-based Heartwood Investment Management, said. 

“We are also exposed to India through its bond market. Since India has capital controls in place, investors cannot buy ‘passive’ exposure (eg index-tracking products) to Indian bonds, so we use an actively managed Indian bond fund which invests in both corporate and government debt. Capital controls also keep Indian rupee volatility low compared to some other emerging market currencies, as well as adding a premium onto the yield of Indian bonds – the Indian 10-year government bond currently yields 7.4 per cent,” Pastakia continued.

“Over the past few years, Modi’s reformist agenda has also impacted the domestic investment landscape. Reforms around financial inclusion mean that nearly all Indian adults now have bank accounts, and domestic investors putting money into mutual funds via Systematic Investment Plans have become a more important part of the market (though they have waited on the sidelines in recent months, perhaps reflecting election uncertainty),” Pastakia said. 

BJP odds
At Pictet, Kothari said: “Our view is the BJP’s election odds have improved given the increased levels of rural expenditure and public support for the BJP in the aftermath of the military skirmish with Pakistan. “We would view a Congress Party win as an ‘upset’ but better quality business would be expected to strengthen in any period of turmoil. Any temporary sell-offs we see as a buying opportunity,” Kothari said. 

"To reiterate, the long-term investment opportunity in India remains in place and we expect good quality companies to continue to grow regardless of different election outcomes or political scenarios,” Kothari added.

Heartwood plotted performance of Indian markets around recent election cycles:

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