What does a Modi victory mean for investors?

While Narendra Modi has won another term, Rukhshad Shroff and Raj Nair look beyond the general election result.

India is a country that lends itself to superlatives as a result of both its size and complexity. With a population of 1.3 billion people, it’s poised to move from the second to the most populous country in the world within a decade.

It is the sixth-largest economy globally, and yet in assessment year 2015-16 only 1.7% of Indians paid income tax. In other words, India is huge and yet still has much room to develop.

The election that has just finished can be described with appropriately awe-inspiring statistics. Around 930 million people have been voting over the past few weeks, in seven phases, including more than 80 million first-time voters –equivalent to the population of Germany.

The result has now been released and prime minister Narendra Modi and his governing party, the BJP, have extended their majority and secured another term in power.

To a large extent, it has, of course, been an assessment of the tenure of Modi.

In economic terms, his forthright style was best characterised by “demonetisation” in November 2016 – a genuine shock the impact of which is not yet fully understood, not least because of some controversy about the accuracy of India’s economic data.

Other notable reforms during this past administration include the implementation of the goods and services tax (GST), which actually marked the completion of a project started by a previous government; and bank recapitalisation, which is a step in the right direction.

But all that said, the bottom line is that politics is neither the key driver of the Indian equity market, nor of how we invest in it.

While leadership continuity will be helpful, in the longer run we see no particular correlation between which party is in power and the pace of GDP growth in India.

What is more crucial is that over the past five years, nominal GDP growth hasn’t fed through to earnings growth: market earnings have been essentially flat for some time now. Normalisation of financial conditions should result in an earnings rebound.

While events at companies such as Reliance Communications and Jet Airways (now grounded altogether) are a reminder that challenges remain, the path towards higher returns looks clearer and more achievable.

Looking beyond the election, we remain of the view that India’s economy remains at an early cycle stage. While valuations may not appear cheap relative to history, with forward price to earnings (PE) around the five-year average but above the 10-year average, we think that is partly because the corporate earnings cycle is depressed.

The long-run growth prospects in India remain very compelling, and with some excellent companies: we maintain a strong preference for high-quality growth franchises that will continue to take market share over time, even as the opportunity set itself continues to expand.

Rukhshad Shroff and Raj Naiir are investment managers at JPMorgan Indian Investment Trust.

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