Will A Legislative Deadlock On Reforms Put An End To India's Bull Market

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Includes: AMZN, EPI, GOOG, GOOGL, GST, INDY, PIN, SCIN
by: Sneha Shah

Summary

Political opposition in India has stalled important economic reforms (e.g GST) for the second consecutive parliamentary session.

However, this does not change India’s secular bull market story as reforms will be passed due to broad consensus.

Though broad market indices have stagnated, mid cap and small cap indices have increased.

The Indian bull market has been in a hibernation for quite a while now, as global and domestic factors have conspired to put a spanner in the works. The broader stock market indices are down ~15% from the peak and many analysts have become somewhat cautious on the markets. The parliament has been stalled by the opposition in the last six months, preventing the passage of important reforms such as the real estate bill as well as the goods and services tax (GST) bill. These are important reforms which should help boost India's GDP by simplifying the process of land acquisition, as well as the tax structure. It will reduce the black money being generated and prevent tax evasion. I had been hopeful that the GST bill would be passed this session, as conciliatory noises were being made by the ruling part towards the opposition.

However the Congress party which has got a majority in the Upper House is hell bent on preventing the growth of India's economy, as it sees little gain for itself if the economy improves. The Congress party which had been relegated to its lowest ever representation in the last elections, is using every small excuse not to let the parliament function. In my opinion, this is only a temporary hindrance and does not change the long term trend. The Bill which has got broad political consensus will pass sooner than later. In the meantime, the government will continue to use executive action to continue the reforms. I would use the temporary lull to keep adding to my position.

Broader indices do not reflect the market direction

While the large caps have seen a decline in prices, the small and mid-cap indices have sharply outperformed as the inflow of domestic money is offsetting the outflows of foreign institutions. The large caps also contain a number of commodity producers, which have been battered by the carnage in global commodity prices. While the prices of a select few stocks such as Vedanta (NYSE:VEDL), Cairn (OTC:CWNQY), Tata Steel (NYSE:TTM), etc. have seen their prices plunge, the broad economy has benefited tremendously. India's crude oil imports have declined by more than 40% over the last one year and contributed heavily in reducing India's fiscal deficit.

Mid-cap and small-cap stocks have smartly outperformed the broader market for the second year in a row, and this outperformance may continue, with focus on specific stocks rather than the index at large. A Mint analysis showed that year-to-date, BSE mid-cap and BSE small-cap indices rose 7.90% and 3.12%, respectively, while BSE Sensex, BSE 100, BSE 200, and BSE 500 indices dropped 5.60%, 4.01%, 2.39% and 1.91%, respectively.

Source - LiveMint

Why I still remain bullish about the Indian economy and markets

a) Macro Economic Stability - While emerging markets face new troubles almost every day, India remains an oasis of peace and stability. The inflation remains low, interest rates are declining and Indian rupee has been extremely stable, while deficits are also quite low. India not only has a reformist government at the center, but also has one of the best central bankers in the world leading the Reserve Bank of India. India also is not facing any major geopolitical unrest nor getting into any major fights. In comparison China is looking at a sharp economic deceleration, Russia is stuck in Syria, while Brazil has become an economic basket case. Even as major Asian economies suffer from the Chinese slowdown, India is insulated as it does not export too much to China.

b) Make in India starting to deliver - The Indian government has made "Make in India" policy one of the key focus points. The PM has been moving around the world to build investor confidence and invite investments into India's manufacturing sector. Some large corporate groups such as Foxconn (OTC:FXCOF), Softbank (OTCPK:SFTBY) and others have already committed to invest billions of dollars in setting up factories in India. The defense sector has been opened up leading to large investments being made by the likes of Boeing. The infrastructure is being beefed up and red tape is being sharply reduced. In his recent visit, Japan's PM Shinzo Abe announced a long term, low rate loan to build a bullet train in Western India. He further committed to fund Japanese companies looking to invest in India. I expect these moves to lead to faster GDP growth over the coming years. Not only will it lead to the creation of manufacturing clusters, but also increase employment.

c) Higher infrastructure investments and policy reforms - Despite the parliament deadlock, the government has not stopped making new policy changes. The government has recently introduced its UDAY reforms, which will look to reform India's power sector. A new tariff policy and a new RE act are also in the process of being announced. Roads are already seeing large investments due to the government's increased allocations. Indian Railways is also looking to dramatically increase investments by reforming its revenue and cost structures.

How to invest in the Indian stock market

Some of the ETFs that you could look to invest to take advantage are

1. Wisdom Tree India Earnings ETF (NYSEARCA:EPI)

2. iShares S&P India Nifty Fifty Index Fund (NASDAQ:INDY)

3. PowerShares India Portfolio (NYSEARCA:PIN)

4. EGShares India Small Cap ETF (NYSEARCA:SCIN)

Conclusion

Despite the short term hurdles being faced, the Indian stock markets remain arguably one of the best places to invest in over the next 5-10 years. This is being recognized by a number of global investors, as rest of the world seems a bleak place. India's per capita income remains abysmally low at just $1500, indicating that it has a long way to grow even to reach middle income levels. Governance is improving in India, while investments are increasing. It is hard to turn around a country of more than 1.2 billion people, but the process is underway. Major global organizations are already recognizing this fact with Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) viewing India as their most important market in the coming years. It is also a relatively safe place to make investments, given that it is a democracy and the rule of law remains independent and unbiased. Compare this to China where heads of major companies can suddenly disappear for long periods of time. I would look to aggressively buy Indian stock on dips.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I hold MF units in the country which might have investment in these stocks