The strong decisive mandate by Indian citizens to the NDA government will ensure continuity of existing reforms process and also embolden PM Narendra Modi to accelerate India's transformation into a more market oriented economy. It is India's opportunity to dismantle its archaic laws, carry out major structural reforms, further improve the ease of doing business and free up resources from inefficient public enterprises to aggressively invest in both infrastructure and human resources.
An environment conducive to enterprise will improve the dynamism of the economy, create jobs, accelerate growth, and in the process also be rewarding to investors.
We would gladly use any knee-jerk reaction as an opportunity to increase our holdings in companies.
Nick Payne, head of global emerging markets, Merian Global Investors: The nature of Prime Minister Narendra Modi’s overwhelming victory is, in our view, positive for the investment backdrop in India. Modi is likely to continue to push forward his much-needed reform agenda, after seeing success in recent years with demonetisation, overhauled bankruptcy laws and unified goods and service taxation.
At first glance, Indian equities currently look quite expensive; however there are some great companies that offer compelling opportunities for investors to tap into that exciting future. We like HDFC Bank and Godrej Consumer Products.
Fitch Solutions Macro Research:
This as the most positive outcome from an investment perspective as it implies broad policy continuity and further economic reforms over the next five years. As such, we have raised India’s short-term political risk index score to 71.0 out of 100, from 65.8 previously.
However, given the religious and national security factors which we believe helped to augment the NDA’s performance at the elections, risks to watch include any rise in tensions with neighbouring Pakistan, and flaring up of religious tensions between the Hindus and other communities. The NDA’s approach to the US-India trade negotiations which would supposedly begin after the formation of the government could be another factor to watch.
A single party BJP majority ... should ensure policy continuity and consolidation of the past five years’ reforms along with more rapid implementation of policies commensurate with the new mandate. Existing policy stances such as infrastructure spending, fiscal consolidation, low inflation framework of positive real interest rates and rate differential along with low food prices, and boosting foreign investment in manufacturing (Make in India) will likely continue.
However, flagging economic momentum and the strong mandate from the rural sector is likely to lead BJP/NDA to deliver on promises of fiscal income transfers, which may lead to increased tolerance for wider fiscal deficits. Other areas of focus could include policies to simplify the goods and services tax (GST), ease conditions for small and medium-sized enterprises, accelerate banking sector reform, boost middle class purchasing power, and prioritise job creation.
Importantly, a strong government might be good for the markets in the short run, but in the long run, transparency and accountability—better-nurtured in a coalition environment—appear better able to avoid drastic missteps that could send its economy backward.
Tackling the trade deficit is [a] challenge. Exports have been hard hit by rising input costs following the GST launch in 2017 and rising oil prices have widened the trade gap. Meanwhile the rupee ... [has] been one of Asia’s worst performers in 2018; further depreciation will put pressure on the deficit.
Indian equities in general have been in expensive territory for some time now, a sticky point for investors. The market remains vulnerable to earnings disappointment. The stocks that stand to benefit from a BJP-led coalition are consumption, information technology, private banks, housing and select mid-caps. Any deep market correction will present us with buying opportunities.
However, the government has got an unprecedented opportunity to build on the base it has created to revive the economy in its second term. Recent events such as the liquidity crunch in the non-banking financial sector had a short term impact on consumption. The market expects the new government will quickly address these issues and take economy back on the growth path.
Given the ongoing clean-up in public sector bank balance sheets as well as the reduction in corporate debt levels, I expect private sector capex cycle to revive in the next 12 to 15 months. Overall, I expect that this historic mandate for a strong and decisive government will help take India’s reform process forward and improve the country’s growth prospects.
We can expect the government to continue pouring money into affordable housing and transport infrastructure, which bodes well for the cement sector, real estate and potentially rural consumption. It could spark a renewed capital expenditure cycle. All of this would provide a cushion to external headwinds, including a deterioration in the US-China trade conflict and any surge in oil prices.
Political continuity only reinforces our positive views on India, whose growth prospects are underpinned by a young population and expanding middle class. We see a huge opportunity to invest in companies with pricing power that sell to Indian consumers. The country boasts a diverse mix of well-managed domestic champions and offshoots of multinationals, supported by a culture of entrepreneurship and innovation. Traditionally strong IT and engineering skills also feed well into the digitalisation trend we see globally.
Sonal Varma, chief India economist; Aurodeep Nandi, India economist; Craig Chan, global head of FX strategy, Nomura:
This outcome is better than expected and promises a stable pro-reform government for the next five years.
