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Summary

  • The Indian Nifty Index has rallied 8.5% since our last Instablog posting on the Indian elections dated April 4th 2014.
  • We stated that if Narendra Modi and his National Democratic Alliance (NDA) coalition was voted in with a clear majority, it could put India into a positive tailspin.
  • Global economic recovery, India's GDP growth bottoming out in FY 2014 and a pro-growth reformist stable central government are all structurally positive for the economy.
  • If Modi really delivers on his promises and global macro remains stable, it is likely that this could be the start of a new expansionary period in the Indian economy.
  • It seems like a turn in the Indian economy is underway, investors trading the US markets can gain exposure via the EPI or INDY.

The Indian Nifty Index has rallied 8.5% since our last Instablog posting on the Indian elections dated April 4th 2014. We stated that if Narendra Modi and his National Democratic Alliance (NDA) coalition was voted in with a clear majority, it could put India into a positive tailspin and the Indian market's positive performance since the election shows that our initial optimism was well founded. The NDA coalition appears to have won 336 out of 543 seats up for grabs in the Lok Sabha with the BJP Party winning an unprecedented 282 seats by themselves. With this unprecedented mandate, the BJP and its NDA coalition will be the first non-congress alliance to get a clean majority since 1977, which also ensures that the government does not have to suffer the de-stabilizing effects of post poll alliances. Given the clear mandate and the track record of Narendra Modi, we can expect the new government to swiftly demonstrate their superior governance and execution skills by a) streamlining and fast tracking pro-growth and development policies including those initiated by the previous Govt.; b) build healthy center-state relations; and c) create a conducive working environment for the bureaucrats.

The Nifty trades at 14.4x FY2015 P/E according to a Bloomberg Survey of Estimates. Over the last five years, the forward P/E band has ranged from 11x to 16.8x and this measure reached as high as 19.5x in 2007. The Global economic recovery, India's GDP growth bottoming out in FY 2014 and a pro-growth reformist stable central government are all structurally positive for the economy, which calls for a re-rating of Indian equities. India's outperformance over other EMs and a stable INR adds to its relative attractiveness. If Narendra Modi really delivers on his promises and the global Macro remains stable, it is likely that this could be the start of a new expansionary period in the Indian Economy and hence the start of a bull-run in Indian stocks. With a strong government mandate, India can slowly move away from the stagflation-type predicament the country finds itself in and let the country's positive demographics and high potential growth take charge. The previous recessionary cycle was caused by high rural wage growth, high fiscal deficit, decline in private investment and a ballooning current account deficit. However, the effects of remedial policy measures outlined in our previous instablog and steps to improve business environment have begun to stabilize the economy. India has one of the lowest age-dependency ratios, measured at 52.4% in 2013, and over the next ten years, India will account for almost 25% of the increase in the global working-age population. These positive demographics with a strong government that can initiate the policies to correct India's macro problems can quickly put India's economy back to a potential growth rate of 7%+. Post elections, Goldman Sachs increased its 12 month Nifty target to 8300 (from 7600), implying 15% upside and 15x forward P/E along with various other brokerages across the street. Morgan Stanley expects India to become a USD 5 trillion economy by 2025 from just being at $1.9 trillion today with an average of 6.75% GDP growth over that time period. It seems like a turn in the Indian economy is underway, investors trading the US markets can gain exposure via the WisdomTree Earnings Fund ETF (NYSEARCA:EPI) or the iShares India 50 ETF (NASDAQ:INDY).

Source: The Modi Rally

Additional disclosure: Business relationship disclosure: The article has been written by a senior analyst at Central Asset Investments. Central Asset Investments is not receiving compensation for it (other than from Seeking Alpha). Central Asset Investments has no business relationship with any company whose stock is mentioned in this article. This article provides general information only. It does not constitute an offer to sell or the solicitation of an offer to buy any interests in any securities, investment product or fund. Investor should consult their own financial advisors prior to making any investment decisions and should not rely solely on these statements or any information presented in order to make such investment decision. Investors should verify the accuracy of any information mentioned in this article. CAI may or may not have an interest in the companies mentioned in this article.