Investors react to India's election result

Modi is celebrating his landslide election victory but challenges await as economic growth slows.
Indian prime minister Narendra Modi's re-election victory has lined up his Hindu nationalist party for a stronger mandate to push through economic reform. 
Market participants have expressed a wide range of views on what the results mean for Indian equities and debt. 
The following remarks have been edited for brevity and clarity:
Ramesh Mantri, director of investments, White Oak Capital Management, investment adviser to the Ashoka India Equity Investment Trust:
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.
Vinay Agarwal, portfolio manager, First State Stewart Asia: 
We strongly believe that the results of the election will have little bearing on the long-term investment case for Indian equities. Firstly, Indian people and businesses are used to political change. Since India liberalised its economy in 1991, we have had several governments with different ideologies, political strength and, what is more, very different tenures as well. A government in 1996 lasted for only 16 days, while another ruled from 2004 to 2014. The current, right-wing government of Modi has an absolute majority in the lower house of parliament whereas a previous government had as many as 27 coalition partners with varied agendas.

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.

Sriyan Pietersz, investment strategist, Asean, Matthews Asia: 
Developing results look like a significantly stronger victory than was expected [for BJP and the NDA Alliance]. The equity market will take this positively, though a surge on the order of 2014 is unlikely as a BJP win has been discounted by prices. We also note that forward multiples are demanding when viewed against the backdrop of a slowing economy and earnings undershoot.

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. 

Uday Patnaik, head of emerging market debt, Legal & General Investment Management:  
Narendra Modi’s BJP-led NDA government looks set to make history in a dominant victory as the only non-Congress government set to return to power. Impressively, the latest trends show the BJP alliance potentially reaching 350 seats in the Lok Sabha out of a total 542 seats. With Modi’s BJP itself expecting to cross the half-way mark of 272 seats, optimism on India’s growth and reform story are set to continue. 
"With economic policies expected to progress (e.g., fiscal consolidation, infrastructure spending), this will provide comfort to both debt and equity investors. In terms of immediate market focus, the changes in the cabinet, specifically who receives the finance ministry appointment, will be important. Modi will be looking for support from the Reserve Bank of India to help arrest the recent slowdown in growth, and the market will also focus on further liquidity injections into the banking sector.
Krishna Kumar, portfolio manager, Eastspring Investments:  
This election outcome is good news for investors as it spells stability and a continuity of leadership and crucial reforms. Overall, the economy appears to be in a much better position than in 2014 ... [averaging] above 7% over the last 10 years. Promoting growth, raising incomes (especially for farmers since the agriculture sector still accounts for 67% of employment) and creating jobs will be critical especially since India’s per capita income is still well below that of other large emerging economies. 

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.

Sandeep Kothari, portfolio manager, Fidelity International:
This is a positive development for India. With a clear majority in the upper house of the parliament, the BJP has got a historic chance to take forward the reform agenda it had embarked in the last five years. Some of the tough economic decisions taken, such as sticking to fiscal prudence and inflation control, implementation of uniform GST and the new Insolvency and Bankruptcy Code had an adverse impact on growth in the last couple of years. 

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.

William Foster, vice president, sovereign risk group, Moody's Investors Service:
Any credit implications of the outcome of India’s general election will be determined by the policies adopted by the government in the next few years. These policies have yet to be formulated. At this stage, we expect the broad push towards fiscal consolidation to remain, although with greater policy emphasis on supporting low incomes.
Kristy Fong, Asian equities investment director, Aberdeen Standard Investments: 
A continuation of Prime Minister Modi’s structural reform agenda would provide a lift to the economy and to corporate India. It would also likely spell good news for stocks.

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.


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