After
a
seven-week
election,
Narenda
Modi
was
sworn
in
as
India’s
prime
minister
for
a
third
consecutive
term.
But
his
party’s
failure
to
win
an
absolute
majority
for
the
first
time
in
10
years
sent
markets
falling
after
a
long
bull
market
for
Indian
equities.
After
the
election
shock,
fund
managers
consider
whether
this
result
affects
the
investment
case
for
India.
The
initial
effect
will
be
to
delay
political
decision
making,
they
argue.
“This
could
lead
to
a
slowdown
in
policymaking
and
a
potentially
more
populist
turn.
However,
we
believe
the
BJP’s
pro-growth
and
investor-friendly
agenda
will
continue
on
the
path
it
has
already
taken,”
says
Ashish
Chugh,
portfolio
manager
at
Loomis
Sayles
(an
affiliate
of
Natixis
IM).
Amol
Gogate,
manager
of
Carmignac
Portfolio
Emerging
Discovery,
says
that
“running
a
coalition
could
somewhat
slow
the
pace
of
government
execution”.
“One
of
the
reasons
Modi
has
been
such
an
effective
leader
is
that
his
party
had
a
simple
majority.
The
market,
or
businesses,
never
had
to
worry
about
a
coalition
partner
standing
in
the
way
of
a
particular
reform
or
legislation.
His
business-supportive
policies
and
fiscal
orthodoxy
have
undoubtedly
underpinned
India’s
strong
recent
performance.
“While
the
election
results
have
certainly
dampened
markets
and
sentiment
in
the
short
term,
they
also
show
that
India
is
a
true
democracy.”
India’s
Stock
Markets
Hits
$5
Trillion
On
January
22,
the
Indian
stock
exchange
officially
surpassed
that
of
Hong
Kong
in
capitalisation
($4.3
trillion
versus
$4.29
trillion),
rising
to
fourth
place
in
the
ranking
of
the
world’s
largest
stock
markets,
boosted
by
the
growing
optimism
of
international
investors
about
New
Delhi’s
economic
prospects.
Currently,
the
Indian
market
is
back
in
fifth
place,
despite
exceeding
the
$5
trillion
market
cap
for
the
first
time.
Overtaking
Hong
Kong
reflected
India’s
exceptional
performance
in
2023.
This
year,
the
trend
has
not
changed
much,
with
the
Morningstar
India
Index
rebounding
15.3%
from
1
January
to
7
June
2024,
compared
to
8.3%
for
the
Morningstar
Emerging
Markets
Index
over
the
same
period
(in
euros).
Here
you
can
see
the
performance
of
some
of
the
India
funds
with
the
highest
Morningstar
Medalist
Ratings:
FSSA
and
Stewart
Investors
are
rated
Gold
and
Liontrust
is
a
Silver-rated
fund.
Expect
Short-Term
Volatility
Now,
however,
investors
are
wondering
whether
things
could
change.
On
June
4,
Indian
equities
posted
their
worst
daily
performance
in
four
years
(-6%)
in
the
wake
of
exit
polls
showing
the
BJP
without
an
absolute
majority.
But
this
may
be
a
shortlived
reaction,
some
argue.
“Although
we
expect
to
continue
to
see
some
volatility
in
the
short
term
as
the
market
assimilates
these
changes
–
the
rotation
towards
stocks
that
have
lagged
the
rally
in
Indian
markets
over
the
past
18
months
may
persist
in
the
short
term
–
in
the
long
term
we
think
the
impact
will
be
minimal,”
says
Nick
Payne,
investment
manager
at
Jupiter
Asset
Management.
“The
last
two
terms
of
economic
reforms
have
prepared
the
country
to
continue
its
current
growth
trajectory.’
In
the
short
term,
Indian
equities
are
vulnerable
as
small
and
mid-cap
valuations
are
high,
says
Kunjal
Gala,
head
of
global
emerging
markets
at
Federated
Hermes.
Investors
should
expect
volatility,
given
the
risk
related
to
government
policies
and
priorities.
In
the
medium
term,
Gala
continues,
the
outlook
for
stocks
will
depend
on
the
trajectory
of
earnings.
“In
part,
this
will
depend
on
the
recovery
of
the
rural
and
agricultural
sector,
the
government’s
investment
plan,
and
the
recovery
of
private
sector
investment.”
India’s
Bond
Profile
The
increase
in
capital
allocation
by
global
investors
is
likely
to
be
a
catalyst
for
the
country’s
future
growth.
To
date,
investment
in
India’s
stock
and
bond
market
has
been
predominantly
domestic,
but
two
events
could
shake
things
up:
the
inclusion
of
India
in
JP
Morgan’s
widely
followed
emerging
market
government
bond
index,
starting
June
2024;
and
the
inclusion
of
eligible
Indian
bonds
in
Bloomberg’s
local
currency
emerging
market
index,
starting
September
2024.
“According
to
our
estimates,
these
two
events
could
bring
up
to
$40
billion
in
new
foreign
investment.
As
international
investors
become
more
familiar
with
the
country,
this
development
should
also
transfer
to
the
stock
markets,”
Carmignac’s
Gogate
says.
This
capital
boost,
coupled
with
Modi’s
pro-business
approach
and
a
well-managed
domestic
financial
system,
could
push
Indian
markets
higher.
But
not
all
stocks
will
benefit,
he
says.
“As
valuations
are
already
high
and
the
political
environment
is
now
more
uncertain,
volatility
could
increase,
so
selectivity
becomes
increasingly
important,”
Gogate
adds.
“In
our
view,
small
and
mid-cap
companies
will
benefit
from
a
likely
investment
growth
cycle,
as
will
financial
services,
high-end
manufacturing
and
real
estate.
The
most
innovative
businesses
with
the
greatest
growth
potential
will
emerge
thanks
to
a
highly
supportive
ecosystem
for
growing
companies.”
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