India: Optimism Triumphant in the Near Term

Singh and the INC have been handed an overwhelming mandate. Now comes the hard part.

Research Edge Position: Short the Indian Equity Market via IFN

"Prime Minister Manmohan Singh's electoral victory, the biggest any Indian politician has scored in two decades, may loosen political shackles that have restrained the country's economic growth as it struggles to free half a billion people from poverty" Bloomberg, May 18

The INC victory announced over the weekend has been received by voters, investors and the global media with near boundless enthusiasm that Prime Minister Singh - the 76-year-old architect of the economic miracle of India's recent decade of growth, will now, allegedly, be able to effect dramatic changes with his new mandate and get the subcontinent back on track to resume breakneck growth levels.

The market response to this absolutely ripped our face off when the Sensex spiked upwards by 17% on the open before trading was halted, only to trigger an automatic trading halt upon reopening two hours later.

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The INC and its close allies have won the most decisive victory in national elections that India has seen in decades. With 261 of the 543 lower house seats squarely under INC's control -a massive percentage in the fractured universe of Indian political parties- Singh's administration will now be able to throw off the fetters of previous coalitions which required compromise with hard core leftist parties.

For Singh, the top priorities now include new programs to reduce rural poverty, finding new lending partners to support increased government spending and building a dialogue with the Obama administration to continue the advances made with Bush team on trade -most notably the civilian nuclear program.

At heart, the Singh vision of emerging Indian strength is based on the belief that the country can move forward socially, by elevating the majority of the nation's population from grinding agricultural poverty. And to accomplish this while largely skipping the industrial phase of development that other emerging economies like China and Brazil embrace.

The single biggest criticism of Singh's policies by the left has been that the economic miracle of the past ten years was not felt directly by the poor. The fastest growth has instead largely been concentrated in the high tech service industry hubs like Calcutta where job creation has been limited to the well-educated and well-born. Without a globally competitive industrial presence, skilled labor job creation for the lower classes has been limited to what internal demand can support - e.g. a nascent automobile industry.

Whether this model works - a thriving minority capable of supporting the social cost of handouts to keep an impoverished majority docile until real change ultimately arrives, remains to be seen. My immediate suspicion is that only by creating competitive export manufacturing industries can the Indian economy create the kind of jobs that will help the nation's poor.

Poverty eradication, however, is not what emerging markets investing is all about: Ultimately the name of the game for a savvy emerging market investor is holding your nose while you try to buy monster growth multiples. Show me an emerging markets PM talking up social justice and I'll show you a man trying to justify underwater long positions.

While we can appreciate that approach (particularly today!), we still can't rectify the INC strategy with the kind of long term growth that could bring hundreds of millions economically empowered consumers online and build internal demand in the coming years, or with a competitive stance for the global manufactured product export markets.

In the immediate term, the bulls are winning in a major way. Beyond a technical pull back in the face of today's rally, the biggest near term negative market catalyst I see is currency strength. The Rupee rose +3% in the election afterglow, achieving its highest levels YTD. Presumably, if this TREND continues, it will dampen investor euphoria for tech service sector names.

Comments

[HaavBline:]

I shorted INP yesterday near closing. It was up 24% in one day. We will see how much higher it can jump near term.

May 19 09:29 AM

[Bandwagon2009:]

I think we in the west may be overreacting to this story. Congress and their partners may have a majority in the central govt, it does not change the equation in the states. Also a strong center can sometime cause a problem -- folks old enough to remember might recall the congress of the 1970s under Mrs. Gandhi -- a strong majority was not good for the economy or democracy at that point. Mr. Singh seems to be genuine intellectual (in the good sense of the word) who favors market reform - so let's hope the new majority govt doesn't get carried away with new pork barrel projects.

May 19 07:29 PM

[Mad Hedge F...:]

I can’t let today’s letter go out without mention of today’s stunning move in India. The Congress Party won an upset victory in national elections, its coalition taking 262 out of 543 seats, paving the way for much needed economic reforms. At the top of the list is a liberalization of foreign investment restrictions, which will unleash torrent liquidity into the stock market. After two limit up moves took the Bombay Sensex ($BSE) up 17%, exchange officials shut down the market. This “melt up” is a great “tell” for global capital markets as it shows you the tremendous extend of the latent buying of high growth emerging markets that is out there. This is a theme that I have been hammering away on all year, and will continue to do so until I cash in my chips (gratuitous Vegas reference).

May 19 11:23 PM

[Uppai Mappla:]

I agree that the Indian market may be overheated in the short term and may call for a correction. Indeed, today (20th May) the market seems poised to go down. But shorting (except intraday) may be risky unless one is an expert trader. This is because a lot of money is waiting to enter--from Indian HNIs, institutions, retail investors and FIIs--since many feel they have missed this rally. These buyers may not allow the market to go down too much.

I think the safe strategy is not to do anything at all today, but watch and seek out a clear trend.

May 19 11:27 PM