March 12 (Bloomberg) -- For the first time in five years, Nilesh Dedhia is buying Indian stocks.
The 48-year-old owner of a die-casting factory in Mumbai is among a growing number of local investors returning to the $1.2 trillion equity market on speculation national elections in May will deliver a government with the mandate to revive economic growth from a decade low. That optimism is spurring the longest stretch of mutual-fund inflows since 2009 and helping the S&P BSE Sensex sidestep the biggest equity losses worldwide in the three other BRIC nations of Brazil, Russia and China this year.
India’s bulls are putting their faith in the opposition Bharatiya Janata Party led by Narendra Modi, who oversaw annual economic expansion of 10 percent as the head of Gujarat state since 2001 and has pledged to boost investment if he takes power from Prime Minister Manmohan Singh’s Congress Party. The Sensex rallied to a record this week on speculation the BJP is gaining momentum among voters, even as the MSCI BRIC Index extended this year’s drop to 9.6 percent.
“Investors are taking a view that the election outcome will be favorable and have begun to put money back into stocks, which is a good sign,” Sam Mahtani, a London-based director of emerging markets at F&C Asset Management Plc, which oversees about $150 billion, said by phone on March 7. India is the firm’s biggest overweight position in emerging markets, he said.
India’s local equity funds attracted 30.5 billion rupees ($500 million) in the four months ended February, recording net additions each month for the longest stretch of inflows since February 2009. Investors withdrew 243.5 billion rupees over the previous 24 months, according to data from the Association of Mutual Funds in India.
Overseas investors added $884.7 million to the local stock market this year, the most among Asian markets tracked by Bloomberg after Indonesia. They bought $20 billion of shares in 2013. U.S.-listed exchange-traded funds that invest in India have recorded a net $144 million of outflows this year.
Investors are buying in India even as they unload shares in Brazil, Russia and China.
Brazil’s Ibovespa has lost 11 percent as commodity exporters such as Vale SA sank. Russia’s Micex Index has led declines among world equity indexes tracked by Bloomberg this year, retreating 13 percent after President Vladimir Putin’s move to wrest control of Ukraine’s Crimea region sparked the worst crisis between the Kremlin and the West this century.
The Hang Seng China Enterprises Index has tumbled 13.4 percent this year as falling exports and slower manufacturing growth fuel concern that the biggest developing economy is weakening.
Meanwhile, India’s Sensex has risen 3.2 percent this year, sending its valuation to 14 times estimated earnings for the next 12 months, data compiled by Bloomberg show. That’s a 71 percent premium over the MSCI BRIC index, versus an average gap of 54 percent during the past three years. The Sensex added 0.1 percent to 21,856.22 at the close in Mumbai.
Larsen & Toubro Ltd., India’s largest engineering company, and Oil & Natural Gas Corp., the biggest energy explorer, have led gains this year with rallies of more than 10 percent.
Surveys by CVoter, Nielsen and the Centre for the Study of Developing Societies predicted the BJP will win the most seats in parliamentary elections. Congress is projected to deliver its lowest-ever tally, as voters in the world’s largest democracy punish the party for the economic slump, graft scandals and the highest inflation among 17 Asian nations tracked by Bloomberg.
The BJP and its allies will win as many as 232 parliament seats, 40 short of a majority, according to a poll released on March 6 by the CSDS. Results are due on May 16.
Proponents see Modi as a leader who can revive growth by scaling back subsidies and attracting investment, while opponents blame him for 2002 riots that killed about 1,000 people, mostly Muslims.
“There will be a change in government soon and that will drive sentiments in the economy and the markets,” said Dedhia. Shares of Petron Engineering Construction Ltd., a Mumbai-based builder, have doubled since he bought them in November.
Some investors are grappling with how much faith to put in pre-election polls after they failed to predict the outcome of the last two national votes. In 2004, Congress won even after the polls suggested the BJP would keep power, leading to the biggest single-day sell-off of stocks in more than four years.
Five years later, after most opinion polls predicted a close fight, Congress won with the largest tally in 20 years, boosting the Sensex by a record 17 percent as investors bet a stronger mandate would allow Singh to pursue economic reforms.
“The market’s read on politics is usually off-center,” Saurabh Mukherjea, the head of institutional equities at Ambit Capital Pvt., told Bloomberg TV India on March 6. “Investors shouldn’t get too taken in by it.”
Still, there are signs of improving health in India’s economy. Finance Minister Palaniappan Chidambaram is predicting smaller budget gaps for this fiscal year, ending in March, and next. The current-account deficit narrowed to a four-year low in the three months through December, easing investor concern that had sent the nation’s currency to a record low in August.
The rupee touched a seven-month high against the dollar yesterday before data today that economists predict will show consumer-price gains eased to the lowest since January 2012.
“Fundamentals have begun to look positive on the margin and the current-account position has improved significantly,” Ritu Gangrade Arora, the chief investment officer at Canara HSBC Oriental Bank of Commerce Life Insurance Co. in Mumbai, said in a March 7 interview on Bloomberg TV India.
India’s individual investors still have room to boost stock holdings, which account for less than 6 percent of their assets, according to Nilesh Shah, chief executive officer at Axis Capital Ltd. Some of that money may get shifted out of gold, a traditional store of wealth for Indian households. Prices of the precious metal tumbled 15 percent during the past year while India increased import taxes three times last year.
In Japan, which has Asia’s biggest stock market, 8.5 percent of household assets are invested in equities, according to the central bank. That compares with 33 percent in the U.S. and 16 percent in the euro zone.
“There will be big shift in allocation from physical to financial assets,” Shah said in an interview with Bloomberg TV India yesterday.
India’s asset managers are already ramping up for a potential increase in demand. Birla Sun Life Asset Management Co. and ICICI Prudential Asset Management Co. are among 16 investment firms that have started 26 new stock funds since November, the most since 2007, according to data compiled by Value Research India Pvt. in New Delhi.
“People have started to warm up,” Mahesh Patil, the co-chief investment officer at Birla Sun Life, which oversees about $13.8 billion, said in an interview on March 5. “We expect much higher local retail investments into equities in the next financial year.”
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