LONDON/NEW YORK – The recent tepid support for Prime Minister Narendra Modi in the latest Indian elections has raised concerns about the stability of business-friendly reforms and has caused foreign investors to reassess their investment strategies in the world’s fastest-growing economy.
Although Modi’s Bharatiya Janata Party (BJP) secured a third term in office, it failed to achieve a majority on its own for the first time in a decade. This political shift has led to significant fluctuations in India’s stock market, with the heaviest selling since the pandemic’s onset. On Tuesday, net foreign selling reached a record $1.5 billion, though stocks saw some recovery on Wednesday.
The BJP’s loss of support in rural areas has investors worried that anticipated land and labor reforms, crucial for unlocking economic value and growth, might be sidelined. Instead, the government may prioritize regaining rural support.
Global fund managers, already cautious about India according to HSBC research, find the current political uncertainty a reason for further caution. Alessia Berardi, head of emerging macro strategy at Amundi Investment Institute, noted the need for a more inclusive and efficient economy, as some parts of the country felt neglected under the previous business-centric approach.
In the market, stocks with high valuations based on expected infrastructure and manufacturing growth fell sharply. Conversely, companies reliant on rural demand, like Nestle India and motorcycle manufacturer Hero MotoCorp, experienced gains. Bonds weakened due to concerns over increased welfare spending and delayed budget consolidation, and the rupee dropped to a seven-week low.
“India has enjoyed a valuation premium for its government stability over the past decade, but some of that premium diminished today,” commented Vikas Pershad from M&G Investments. He anticipates a short-term shift in priorities towards rural consumers and the working poor.
Defensive Strategies
Investors have thrived under Modi’s leadership, with India’s equity benchmarks more than tripling since he took office in 2014. The MSCI India index’s annualized total return was 7.1 percent, compared to 1.3 percent for MSCI’s Asia ex-Japan index. Despite the election results, analysts believe India’s growth trajectory will remain stable, supported by a steady currency and attractive debt market.
Kristina Hooper, chief global market strategist at Invesco, sees this as a buying opportunity given India’s strong growth outlook. However, portfolio adjustments are common post-election. Pershad, for instance, sold defense stocks and bought into healthcare, while CLSA analysts shifted from infrastructure giant Larsen & Toubro to IT firm HCL Tech.
The upcoming budget, due in July, will be crucial for policy direction, especially with expectations to use the central bank’s surplus to reduce the deficit below the targeted 5.1 percent. Sonal Varma, chief economist for India at Nomura, highlighted the budget’s role in outlining the government’s five-year plan.
Foreign investments, which surged as investors moved away from China’s declining markets to India, are now showing signs of reversing. Paul Christopher from Wells Fargo Investment Institute advises clients to proceed cautiously with investments in India, citing ongoing uncertainties.
In conclusion, while India’s long-term growth prospects remain robust, the current political landscape introduces a level of uncertainty that warrants careful consideration from investors.