What a difference six months makes. Speaking in September last year, we had warned of ‘excessive pessimism’ afflicting the market’s perception of India. Since then, responsible central bank policy from the Reserve Bank of India (RBI), alongside improving global growth, has meant that India’s macro environment is strengthening quickly. The current account deficit has shrunk, inflation is falling and the government has embarked on a heavy dose of much needed fiscal consolidation. As a result, the rupee has been one of the strongest global currencies this year while the market has touched all-time highs, rallying by more than 20 per cent (GBP) since September. This begs the question: are we now in a period of ‘irrational exuberance’? Not yet.
More than 800 million Indians will go to the election polls in the next month as they participate in the largest global democratic exercise of its kind. These elections are critical since global investors are evaluating all emerging markets through the lens of reform potential. The frontrunner in India, Narendra Modi of the BJP, has exhibited decisive reformist ability over the past 13 years in his state of Gujarat. His economic manifesto focuses on industrialisation, investment in infrastructure, clearing red tape and fiscal federalism. A positive election result for the BJP will be celebrated by the market: the BJP acknowledges the correct supply-side constraints of the economy and is determined to kick-start a capex cycle to reinvigorate growth. Indeed the combination of the RBI moving responsibly to an inflation-targeting regime, alongside a government fixated on supply-side reform, would be a formidable policy mix.
Modi continues to thrive in the polls — we noted serious momentum building behind him as he has struck a chord with the 97 million newly enfranchised youths. He has commandeered social media and promised more than 10 million jobs by reviving the static manufacturing sector — this will be critical in reaping India’s unparalleled demographic advantage. If the BJP is able to gather more than 220 seats on 16 May, the implications will be significant. In particular, domestic cyclicals and mid-caps will outperform as domestic investors finally return to the market. Coupling a re-rating market multiple alongside an earnings upgrade cycle is the holy grail for investors — India could well be the surprise of 2014.
For more Neptune market views please click here.
Important information — for professional investors, not retail clients
Forecasts are not a reliable indicator of future performance. The value of an investment and any income from it can fall as well as rise as a result of market or currency fluctuation and investors may not get back the amount originally invested. Investments in emerging markets are higher risk and potentially more volatile than those in established markets. Past performance is not a guide to future performance. Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or completeness. Neptune funds may invest more than 35 per cent in government and public securities in a number of jurisdictions.
These are Neptune’s views and as such this document is deemed to be impartial research. We do not undertake to advise you as to any change of our views. This is not a solicitation or an offer to buy or sell our funds. All information is given in good faith but without any warranty. Neptune does not give investment advice and only provides information on Neptune products.