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Election Elation: India Could Be The Year's Top BRIC

23 May 2014 in Trading Ideas

You could say that the landslide victory in India this week that will make Narenda Modi the country’s next prime minister has created a spate of investor enthusiasm.

For some, however, that would be an extreme understatement. See, for example, what billionaire investor Rakesh Jhunjhunwala, a character sometimes called “India’s Warren Buffett,” told the Financial Times over the weekend: “I have no doubt that we have started the biggest bull market that at least I will see in my lifetime.”1

High praise, indeed – especially when one considers that the year has already treated Indian investors pretty well. In fact, of the four so-called BRIC economies – Brazil, Russia, India and China – it’s India that’s on top, with its Sensex up about 15%.

And other investments with Indian focuses have also fared well recently. The Asian Fusion and BRICS Building motifs are up 3.9% and 2.3%, respectively over the past month. The S&P 500 has gained 0.3% during that time.

 

In 2014, the Asian Fusion motif is up 0.2%, while the BRICS Building is up 1.5%. The S&P 500 has gained 3% so far this year.

Many analysts hadn’t been that surprised that the rise of Modi and his Bharatiya Janata Party has captured the country’s enthusiasm with its “toilets before temples” and “less government and more governance” campaign, while boosting the moods of Indian-focused investors as well.2

And, some say, that trend is likely to continue if Modi moves quickly to rejuvenate India’s many troubled infrastructure projects in sectors including power and road building, helping reduce the widespread stress on industrial balance sheets.

As the FT noted, however, for a sustainable bull run in the country’s stocks foreign investors will have to increase the relatively puny $6 billion they have placed into Indian equities so far this year as fund managers waited cautiously for election results.

Yet higher inflows do now seem likely, the FT said, especially given the average of $25 billion plowed into India in both 2012 and 2013 – both years when the country was suffering from sharply slowing growth and rising investor disfavor toward the country’s political leaders.

 

Getting that level of inflow will also require moribund corporate earnings to show signs of revival, having remained flat at best in recent quarters – even as the country’s equity markets have jumped.

The FT said this has left Indian shares looking expensive next to regional rivals, according to Hugh Young, managing director of Aberdeen Asset Management Asia.

All of which suggests that the real key to a longer-term rally in India may have everything to do with how well the new government delivers on the hopes of political reforms that have underpinned the rally that investors have enjoyed so far.

1James Crabtree, “Modi’s win a red flag to India market bulls,” FT.com, May 19, 2014.

2Seema Mody, “India stocks are hot – the question is for how long,” CNBC.com, May 19, 2014, http://www.cnbc.com/id/101685459.

Historical performance data provided as of May 22, 2014.

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