Modi’s win a red flag to equity market bulls
TWO words rang out around India’s financial houses this week as investors digested opposition leader Narendra Modi’s thumping victory in national elections: bull market.
Last week’s triumph for the Bharatiya Janata Party exceeded even the highest expectations, which had already driven the Sensex index of leading shares up 17% in the three months to polling day, in turn pushing the total value of Indian equities to $1.4-trillion (about R14.5-trillion).
Rakesh Jhunjhunwala, an ebullient character and billionaire investor sometimes dubbed India’s Warren Buffett, began the charge: “I have no doubt that we have started the biggest bull market that I will see in my lifetime,” he said last weekend.
Having watched the Sensex surge above 25 000 for the first time on election results day, analysts in Mumbai were equally enthusiastic.
“Nothing goes up in a straight line in India, but unless something very untoward happens, I reckon that two years from now we’d get something like Sensex 37 000 or 38 000 — and that is being very conservative,” said Saurabh Mukherjee, head of equities at Ambit Capital.
Rashesh Shah, chairman of broker Edelweiss Financial Services in Mumbai, said: “There is a significant portfolio reallocation going on. For the last few years everyone has been sheltering in tech and consumer . . . now the centre of gravity has moved strongly to cyclicals.”
That trend is likely to continue if Modi moves to rejuvenate India’s troubled infrastructure projects in sectors including power and road building. Relatively inexpensive public sector financial institutions such as the State Bank of India are another probable beneficiary, along with state-backed energy groups.
But for bull market hopes to materialise, foreign investors will have to increase the relatively puny $6billion they have placed in Indian equities so far this year as fund managers waited cautiously for election results.
Yet higher inflows do seem likely, especially given the average of $25billion ploughed into India in both 2012 and 2013, according to Goldman Sachs economist Tushar Poddar.
To meet or beat that average, Modi will have to trim the fiscal deficit and improve his government’s decisionmaking while also tackling longterm problems such as labour market and tax reform.
Moribund corporate earnings need to show signs of revival, too, having remained flat at best in recent quarters even as equity markets have jumped. Yet, although earnings may now rise more quickly than those in other comparable Asian economies, the real risk is that India’s new government fails to deliver on hopes for political reforms that have underpinned recent jumps in share valuations.
“There is an old market adage that it is better to travel than to arrive, meaning people get all excited about something and then the price drifts away when it happens,” said Young.
“We hope he [Modi] does marvellous things and knocks heads together, but years of bitter experience makes us instinctively cynical. Let’s watch and see.” — © The Financial Times, London