Why India Has Embarked On A Long-Term Bull Market - Part 1

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Includes: EPI, INCO, INDY, SCIN
by: Sneha Shah

Summary

New business friendly government has started implementing economic reforms.

India benefits from falling commodity prices being a large importer of oil and coal.

Policy tightening has helped bring inflation to five year lows.

I had been extremely pessimistic about the Indian stock markets, given the numerous economic, political and social issues that the country was facing at that time. However, things have changed dramatically in the last one year. The stock market has also climbed by more than 50% from its 2013 lows, as the mood amongst investors and public has become upbeat. There are a number of fundamental reasons why the stock market has gone up apart from the sentiment change. The BJP led government has come with a majority in the Indian parliament. This means that it is much easier for Prime Minster Modi to pass reforms without making too many compromises. The earlier collation governments led by the Congress party could not take any major decisions, as fickle allies refused to support important legislation. The Modi government is also known for its pro-business policies and its razor sharp focus on growing the economy. The last government had gone overboard with populist policies leading to high inflation, and slowing GDP growth. Here are some other factors that will make the Indian stock market one of the best emerging markets right now.

Indian Positives

  1. Decisive Pro-Business Government - The new BJP government is led by a very decisive, hardworking and smart Prime Minister Narendra Modi. He has single handedly managed to get his party a majority in the parliament despite all odds. The PM has managed to win despite the massive opposition from both his party and allies. His part performance as the leader of one of India's most industrial state and strong leadership skills has made him the tallest leader in India right now. In just 5 months, he has shown tremendous energy by visiting all the major countries such as USA, Japan, Australia etc. and ushering in major new policies such as "Clean India" and "Make in India". He has also managed to increase FDI levels in different sectors and launched reforms in the labor sector.
  2. Economic Reforms - The government has set a target of making India one of the best places to invest in and has taken both hard and soft measures to improve the investment environment. The government is all set to launch more reforms in the insurance sector and a nationwide common good and services tax regime.
  3. Falling Inflation - India's inflation has fallen dramatically in recent months, due to combination of falling commodity prices as well as tightening of interest rates by India's Central Bank led by one of the world's top economists Raghuram Rajan. India which had been suffering from double digit inflation recently saw wholesale price inflation fall below 2%.
  4. Other major emerging markets are in a sorry shape - While India is all set to see its GDP growth rate increase to 6% from the below 5% currently, other BRICS economies are in a sorry shape. China, Brazil and Russia are all expected to see their growth rates decline. While ruble is in a free fall, Brazil also faces a bleak future under its present government. China is also seeing a sharp fall in GDP growth.
  5. Falling Commodity Prices - India is a big importer of commodities and is one of the biggest beneficiaries of falling prices. More than 50% of India's trade deficit is due to oil imports. The rising oil prices had led to high current account deficits making it hard to control inflation and currency depreciation. The sharp fall in oil prices will immensely benefit India. The country also imports high amounts of coal, gas, edible oil etc. Falling prices of all commodities will benefit India, while it will adversely impact other countries such as Russia and Brazil.

Risks

Corruption - India is a highly corrupt country like most other developing countries. Corruption in the last few years has directly impacted India's growth as major scandals in allocation of telecom spectrum, coal mines etc. had led to a sharp decline in these sectors. While the new government has not faced any major scam till now, it is only a matter of time before a big scam hits given the endemic nature of Indian corruption. Unless the new dispensation takes some major action against corruption, the growth will be derailed again.

Market Performance

India's benchmark BSE Sensex is making new all-time highs and crossed 28,000 for the first time. India's currency has also stabilized at the Rs 60-62 levels, even as other emerging market currencies are taking a major hit against the USD. India's market is not very cheap after the rise in the stock market in the last one year. Even as most global stock markets swooned last month due to Ebola scares, India's markets fell by just 5%. India's retail investors are also returning to the market once again, as mutual funds are starting to see strong inflows.

How to invest in the Indian markets

There are some good Indian ADRs listed on the US markets which one might look to invest in. Investors are advised to do their own due diligence before investing in these ADRs. Here is a list of these Indian ADRs.

Banks

ICICI Bank (NYSE:IBN)

HDFC Bank (NYSE:HDB)

IT outsourcers

Cognizant (NASDAQ:CTSH) (I am highly positive about this company and you can read my investment thesis)

Infosys (NASDAQ:INFY)

Wipro (NYSE:WIT)

Others

Tata Motors (NYSE:TTM)

I would not advise anyone to buy Indian market ETFs right now but if someone has a contrary opinion he may look to invest in the following ETFs:

  1. WisdomTree India Earnings ETF (NYSEARCA:EPI)
  2. iShares S&P India Nifty Fifty Index ETF (NASDAQ:INDY)
  3. PowerShares India Portfolio (PIN)
  4. EGShares India Infrastructure ETF (INXX)
  5. EGShares India Small Cap ETF (NYSEARCA:SCIN)
  6. EGShares India Consumer ETF (NYSEARCA:INCO)

Summary

In the next few articles, I am going to examine each of the major factors that is making the Indian stock market a great investment. While in the last few years Indian markets were facing headwinds from all directions, now they are being pushed forward by multiple tailwinds. Falling commodity prices have proven to be an unexpected boon for the Indian consumers and investors. If the Indian government follows up on its promises and I don't see any reason for it not to do so, then the stock markets are in for a long bull run. India's per capita income is extremely low at ~$1500 and India can grow in the high single digits for a long time (like China), before it reaches the middle income status. Most of the enabling factors are all in place and it is just a matter of time before we start seeing the "Indian Elephant" perform to its potential. In the short term, we may see some correction due to the sharp run up in prices, but in the medium and long term, I expect the market to be much higher than now.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.