Are the wheels coming off Modi-mania?

PRESS RELEASE
For immediate release
10 November 2015

Are the wheels coming off Modi-mania?

Jason Hollands, Managing Director of Tilney Bestinvest, who recently returned from a trip to India, shares his thoughts on the outlook for India to coincide with this week’s visit to the UK by Indian prime minister Narendra Modi.

This week sees Indian Premier Narendra Modi visit the UK for the first bilateral trip by an Indian leader since 2006. A highlight of the visit will be a rally at Wembley stadium on Friday expected to be attended by 60,000 British Indians at which Mr. Modi will be introduced by David Cameron. With both leaders keen to develop trade and investment links, they will be mindful that tomorrow is Diwali, the Festival of Lights, when Hindu’s honour Lakshmi, the goddess of wealth.

Of course the trip – which is the culmination of a globe-trotting tour by Mr. Modi – is intended to project the image of a newly confident India that it is open for business. Mr. Modi has been seeking to build on this image since the landslide victory of his BJP-led National Democratic Alliance eighteen months ago, and the visit seeks to amplify the message of his “Make In India” campaign which is aimed at attracting Foreign Direct Investment into India.

Instead, Mr. Modi will arrive fresh from a bruising rout for his BJP party in elections last week in India’s third largest state, Bihar, which have cracked his image of invincibility and will leave some investors asking whether this is a sign that the wheels are coming off the Modi-mania bandwagon that swept the nation a year and a half ago and put India on the radar of international investors.

While 2014 was a stellar year for returns on Indian equities, which saw the MSCI India Index rise 29.9% in total returns (sterling), as investors were swept up in the excitement surrounding the election of a Government that promised important economic reforms and had a strong electorate mandate to enact them, 2015 has seen much of this euphoria dissipate, with the market declining 4.8% year to-date.

Having just returned from a trip to India, it was very apparent from reading the Indian press each day that the result in Bihar and opposition further afield was, and is, primarily centred on controversies over communal tensions and criticism of the strident Hindu nationalism within Mr. Modi’s support base. Resistance to economic reform and development does not appear to be the major driver of this electoral drubbing.

Yet there are clearly grumblings in some quarters of the financial markets about the pace of reforms, leading to some feeling underwhelmed. In my view this is a result of unrealistic expectations in the run up to and immediate aftermath of the elections, which pushed valuations too high, too quickly. The subsequent sense of deflation in certain quarters is indicative of the often impatient nature of capital markets when confronted by the grindingly slow pace of real-world politics.

Key measures such as the creation of unified Goods & Services Tax, an amalgamation of a patchwork of tariffs, and a Land Acquisition Bill designed to ease the process of making compulsory land purchases in order to speed up infrastructure projects, have yet to complete because of the frustrating pace of the political process. While Mr. Modi’s Government enjoys control in the Indian parliament’s lower house, this is not the case in the Rajya Sabha, the upper chamber, where representation is determined by the strength of parties in each State. Irrespective of the outcome in Bihar, the governing alliance is a long way off control of the upper house and so the only way forward is through consultation and negotiation – and that process of horse-trading takes time.

Despite the political setbacks and frustrations of over-bullish investors, India is in a relatively bright spot compared to many other emerging markets, with GDP growth forecast to be around 7.5% this year – the fastest growing economy in the world according to the World Bank.

Of course, much of this is down to fortuitous circumstances rather than policy initiatives. India has low trade exposure to China, whose own economic slowdown is at the nexus of concerns around global growth. Additionally, whereas depressed commodity and energy prices have hurt many emerging market countries, this has been a positive factor for India, a net importer of energy, providing the Government with the cover to eliminate costly fuel subsidies and instead tackle the nation’s current account deficit and improve its foreign currency reserves. This should help it weather potential US interest rate rises that might prove very painful for other emerging nations. Weak inflation across the globe has also provided the Reserve Bank of India with the scope to aggressively cut interest rates, by 125 basis points so far this year, and with the headroom to go much further.

Important measures, such as improving transparency and scrutiny over bureaucrats and the biggest ever exercise to improve financial inclusion, involving the opening so far of more than 125 million bank accounts, should prove very significant over the longer-term. They are not quick fixes but incrementally important changes, so investors tempted by India need to be prepared to invest for the long-haul.

In particular India has long-been regarded as a notoriously difficult place to do business, where foreign direct investment has been subject to all sorts of restrictions and retrospective taxes have been bruising for firms such as Cairn Energy and Vodafone. If Mr. Modi can deliver on his pre-election promises to end “tax terrorism” and open India up to the world, then the huge long term potential of India can be unlocked.

As anyone who has visited India will attest, it is fascinating, diverse, and vibrant but it can also be a frustrating country with serious socio-economic challenges. Problems seen on previous visits are still all too evident: widespread and appalling poverty, creaking infrastructure and stifling bureaucracy. Yet it is also noticeable how rapidly some of the cities have grown in recent years and perhaps most importantly of all, you cannot avoid the fact that India is a young country. The average age in India is estimated to be around 26.7 year old (and falling), which compares favourably to 36.7 years in its key emerging market rival China which has recently had to backtrack on its controversial one-child policy. The combination of positive demographic trends and the scope to unlock India’s potential through gradual liberalisation, represents a major opportunity for investors willing to take a long-term view.

Given the high risk nature of investing in emerging markets, most investors should seek to achieve exposure to India through Asian and Global Emerging Market funds rather than single country funds. For example, the Stewart Investors Asia Pacific Leaders fund currently has 25.2% invested in India compared to a benchmark weighting of 8.2%, through exposure to stocks such as Dr. Reddy’s, a pharmaceutical firm which develops affordable generic versions of expensive medicines, and Mumbai headquartered Kotak Mahindra Bank.

Another portfolio with a high India weighting of 24.8%, is the JP Morgan Emerging Market Investment Trust. These include banks Housing Development Finance Corporation and Indusind Bank; conglomerate ITC whose interests span hotels, paper and packaging, consumer goods and information technology, and Infosys a global technology, consulting and outsourcing firm.

For those prepared to take the much greater risk of a single country fund, options worth considering include Jupiter India and the JP Morgan Indian Investment Trust which is currently trading at an 11.7% discount to NAV.

-Ends-

Press contacts:

Jason Hollands
0207 189 9919 / 07768 661382
jason.hollands@tilneybestinvest.co.uk

Gillian Kyle
0203 818 6846 / 07989 650 604
gillian.kyle@tilneybestinvest.co.uk

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