It elicited mixed market reactions which on the whole were still positive. While Jaitley heralded a commitment to be robust on containing the deficit, he also revealed reforms aimed at delivering 7-8% GDP growth rates within three to four years. Among the announcements made were the intention of creating a unified tax system across India’s 29 federal states, and raising the level of foreign direct investment permitted in the insurance and defence industries.
“Expectations of this government are running incredibly high, both at home and abroad. The strength of the new government’s mandate brings an end to years of crippling political gridlock which have frustrated the pace of much needed reform,” managing director at Bestinvest, Jason Hollands said.
Indian equities rallied strongly year to-date with the MSCI India Index rising 18% in the first six months of 2014. This made it the best performing equity market in the world over that period, compared to the total returns from the both the MSCI Emerging Market Index and MSCI World Index which rose 3%.
Given the steep rally, are Indian stocks still on investors’ buy lists or has the excitement ballooned expectations?
A bright spot
Investors are wary of emerging markets, and India is seen as a relatively bright spot in amongst its peers. International investors have become increasingly more bullish on the outlook for India – inflows into US mutual funds investing into Indian equities accelerated rapidly.
“Modi’s election victory has heralded a real turnaround in sentiment towards the Indian stockmarket,” according to Laith Khalaf, senior analyst, Hargreaves Lansdown.
He added that Indian shares are not particularly cheap, but not particularly expensive either. The Indian stockmarket rallied strongly recently, after a relatively lacklustre 2013. The market has returned 21% so far this year, and 7% since the Indian election in May 2014. This puts the Indian stockmarket on a Price/Earnings ratio of 18, in line with its long term average over the last 25 years, suggesting shares are neither a bargain, nor overpriced, by historical standards.
“According to Morningstar, Indian equity funds saw the highest organic growth of any sector in May. Many of the global emerging market managers we rate highly are also heavily overweight India, typically running positions that are more than double India’s 6.3% weighting in the MSCI Emerging Markets Index,” Hollands said.
Not for the faint-hearted
When expectations run high, so do the risks of a sharp drop down. Most investors exercise caution when it comes to snapping up stocks.
“It’s an incredibly large market with a lot of stocks listed, some 10,000. Economically there is huge potential under Modi but also big hurdles to get through,” Richard Philbin, multi-manager at Harwood Capital.
“We do have a position in the country through the JP Morgan Indian Investment Trust. We topped up our position earlier this year, and now have two positions in the market. Both investments are making money.”But he added that he wouldn’t probably not top up his position.
“Investing in a single country is more risky than across countries. There is a market opportunity, but that is connected with volatility. Stocks move on a year-by-year basis around 30%. If investors can handle that, then they should be in a good position. For now it’s worth sitting on the side-lines and watching it all fall back again.”
For Gary Potter, co-head of F&C’s multi-manager team, India should not be seen as an asset class in itself.
“Investors called India a basket case last year, and now it’s seen as the Holy Grail – and it’s clearly not. We’re still early in the journey.”
He added that India is a “specialist region, with specialist drivers”.
“Broader investors should not look at India too specifically. We look at India in the context of broader Asia and emerging markets.”
Cautious approach
Investors are generally retreating into cautious territory amid the general euphoria of change and opportunity in India’s market. While the sentiment is largely positive, the risks are being kept in perspective. Those who have positions in the market, got in there earlier in there year and now are watching to see how these play out as the government starts implementing policies.
