After Rising 25%, Indian Bull Market Could Run for Years
In his first year in office, India’s prime minister, Narendra Modi, has lived up to Barron’soptimistic predictions. In what the local press has dubbed the Modi Wave, he and his Bharatiya Janata Party have shaken up the sclerotic Indian economy by attacking bureaucratic inertia, uprooting corruption, modernizing the country’s outdated infrastructure system, and promoting entrepreneurship over vast subsidy programs designed to win votes from the poor. Not surprisingly, India’s main stock market benchmark, the S&P BSE Sensex, has jumped 21% since our story, and the MSCI India Small Cap index has risen 43%. Barron’s Indian stock picks have done as well as the latter group.
As we suggested (“India: Open for Business,” May 5, 2014), the new government “has begun to target India’s sprawling and deeply inefficient state monopolies” like Indian Railways, “the granddaddy of the state sector,” according to research from Gavekal Dragonomics analyst Tom Miller, who follows the Indian subcontinent from his perch in Beijing. The Modi government intends to separate ownership of the tracks from ownership of the operators of the trains, allowing foreign investors to provide some services. The idea is to create a more competitive, responsive rail system.
New laws also promise to open up mining to private business and partially privatize India’s second-largest state enterprise, Coal India, which has long been a cesspool of inefficiency, crony deals, and abject corruption, Miller notes. Similar sorts of measures are under way to permit more local and foreign private investment in telecommunications and life insurance.
Money is also starting to be shunted to India’s Third World road system to make manufacturing both by domestic companies and foreign concerns more attractive.
To be sure, Modi’s government is moving more slowly than the Indian press—given to magical thinking like some of the electorate— would prefer. After 60 years of mostly cynical socialist ideology under the Gandhi-family-led Congress Party, India has plenty of obstructionist government officials at the central and state government levels who put their interests ahead of those of the nation.
Signs of a revival in the Indian economy are as much a matter of exogenous developments as the dogged persistence of the Modi gang. The collapse in oil prices (India is a major importer) has helped bring down India’s inflation rate from above 8% in early 2014 to near 5%. This, in turn, has permitted India’s central bank, the Reserve Bank of India, to make two reductions in policy rates just this year.
Gross-domestic-product growth is perking up, which had begun even before the Modi election. According to the latest estimates of the International Monetary Fund, India is expected to notch GDP growth of 7.5% both this year and next, better than China’s projected output, as the Indian press endlessly points out. However, India is growing from a lower base, with an economy less than a fifth of China’s.
Still, the Indian rupee has appreciated against the U.S. dollar, while the currencies of rivals Brazil, Russia, and South Africa have plummeted.
The Modi Wave has also rolled through India’s stock markets, sending prices higher even before his election. Our original story was accompanied by stock and fund picks (“Where to Invest in India”) from our colleague Reshma Kapadia. They’ve risen an average of 40% since. She suggests holding on to the funds and most of the stocks but taking profits in high-performing infrastructure financier IDFC (ticker: IDFC), and trimming underperformers Bajaj Auto (BJAUT.India) and Mahindra & Mahindra (MM.India). In their place, a beneficiary of higher wages like shoe maker Relaxo Footwears (Relaxo.India) could be a good choice.
Despite a recent decline , Indian stock prices are likely in “the early innings” of a sustained bull market, says David Nadel, Royce Funds’ international research director and an early proponent of online share market. “Like the long dusty roads filled with potholes in the Indian countryside, the Indian market won’t give an investor a completely smooth ride in the years ahead, but the secular growth story will prove powerful and long-running,” he tellsBarron’s.
Other astute investors are buying the India growth story. In a recent note, Bridgewater Associates, the globe’s largest hedge fund complex, with more than $160 billion under management, ticked off several of the positive developments, such as increased investment, streamlined bureaucracy, growing foreign investment, and the redeployment of spending from wasteful subsidies into infrastructure. “These strengths have led to recent outperformance of Indian assets, but our measures suggest that there is much further to go,” the report concludes.
Noted fixed-income manager Jeffrey Gundlach of DoubleLine Capital recommends that investors buy Indian stocks and put them in a safe for 20 years before opening—to enjoy a pleasant surprise.
That’s a long time. But there’s a lot to do.
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