India Led by Modi Emerges as ETF Favorite Testing HistoryRajhkumar K Shaaw and Santanu Chakraborty
Kisan Ratilal Choksey has seen more than 20 bull markets turn into bear markets in India since opening his namesake investment firm in 1979.
This one now, he said, feels different.
“I have never been so bullish and confident in my life,” Choksey, the 75-year-old chairman of Kisan Ratilal Choksey Shares & Securities Pvt., said in an interview last month at his office on Dalal Street in Mumbai, near the birthplace of Asia’s oldest stock exchange. His firm predicted the S&P BSE Sensex’s current bull market rally within 10 days of its start in 2011.
Choksey’s optimism stems from his conviction that Prime Minister Narendra Modi will follow through on pledges to revive economic growth after securing last month the nation’s largest election victory since 1984. Modi, 63, has also won the confidence of foreign investors, who bought about $17 billion of the nation’s shares since September and poured more money into Indian exchange-traded funds than any other emerging market.
The rally is part of a broader rebound in developing-nation stocks that’s pushed the benchmark MSCI gauge up 14 percent from a five-month low in February. Like in India, elections have played a part in the rally in other places, with stocks climbing everywhere from Egypt to Indonesia to Brazil on speculation new administrations will take office and implement measures to bolster growth.
India’s Sensex benchmark has soared 68 percent from its December 2011 low and closed at a record high on June 10.
While that’s the biggest gain among the 10 largest developing countries, the rally is still 26 percentage points shy of the average Indian bull market during the past 30 years, data compiled by Bloomberg show. What’s more, the Sensex’s valuation is still about 28 percent below its all-time high set in 2007, and analysts predict earnings will jump more than 20 percent to a record in the next 12 months, data compiled by Bloomberg show.
“I am bullish, bullish, bullish on Indian equities,” said Singapore-based Samir Arora, founder of hedge fund Helios Capital Management Pte. The Sensex has climbed 22 percent since Arora said in February he was boosting Indian stock holdings.
The 52-year-old money manager, whose investments in India 30 years ago included Xerox Modicorp Ltd., is now buying shares most sensitive to economic growth.
Those companies have led gains since Modi’s Bharatiya Janata Party won the elections with 31 percent vote on May 16. Larsen & Toubro Ltd., the largest engineering company, has surged 57 percent this year for the top advance in the Sensex, while State Bank of India Ltd., the nation’s biggest lender, has increased 50 percent.
Overseas investors boosted their holdings to a record 20.8 percent of the S&P BSE 200 Index as of March 31, according to Macquarie Group Ltd. U.S.-traded ETFs that invest in India have lured $1.5 billion since Modi was named the BJP’s candidate for prime minister on Sept. 13, the most among 20 emerging-market countries tracked by Bloomberg.
India’s individual investors are also buying stocks. Local mutual funds attracted net inflows of 25 billion rupees ($416 million) in May, the most in five years, after recording 255 billion rupees of net outflows during the previous two years, according to the Association of Mutual Funds in India.
“Over the next year or so, the retail investor will come back, the IPO market will flourish, and the secondary market will do well,” Ramesh Damani, 57, the founder of Mumbai-based investment firm Ramesh S. Damani Finance Pvt. who has been trading Indian shares since 1989.
Three decades ago, investor optimism over a strong Indian government turned into disappointment as policy makers failed to push through economic reforms. Rajiv Gandhi’s Congress party won India’s largest-ever electoral mandate in 1984, following the assassination of his mother, former Prime Minister Indira Gandhi.
While the Sensex more than doubled in the 14 months after the election, it fell as much as 41 percent from February 1986 through March 1988 amid an arms bribery scandal that led to the defeat of Rajiv’s government in 1989.
Modi’s efforts to jump-start growth may get derailed by factors outside his control. Oil climbed to a nine-month high on June 13 and monsoon rains are forecast to be below normal this season, threatening to stoke Asia’s second-fastest inflation. The Sensex rose 1.3 percent to 25,521.19 at the close in Mumbai today.
Rising valuations also pose a risk to the rally, according to Anil Ahuja, the chief executive officer of Singapore-based IPEplus Advisors. The Sensex trades at 15.7 times estimated profits for the next 12 months, near the highest level since January 2011 and a 43 percent premium over the MSCI Emerging Markets Index, according to data compiled by Bloomberg.
“We are in a euphoria zone,” Ahuja said in an interview on Bloomberg TV India. “India is a hope-turning-into-reality play.”
Valuations in the Sensex are still lower than levels reached during previous bull-market peaks. The gauge’s forward price-to-earnings ratio climbed to 18 at the height of the last bull market in November 2010, about 15 percent above its current level, and the multiple reached 21 at its peak in 2007, data compiled by Bloomberg show.
Investor support for Modi stems from his record as the head of India’s Gujarat state, where he oversaw annual economic growth of 10 percent since 2001.
While Gujarat boomed, the national economy has slowed. Under former Prime Minister Manmohan Singh’s Congress party, the growth rate fell to a decade-low of 4.5 percent in the year ended March 2013. At least 284 projects are stuck because of delayed environmental clearances to blocked land acquisitions, government data show.
The “policy paralysis” that has dragged down growth will ease under the new government, Rahul Chadha, the co-chief investment officer at Mirae Asset Global Investments Hong Kong Ltd., which oversees $60 billion, said in a May 28 interview. “We are at the cusp of a multi-year bull run.”
Modi’s government will build 100 new cities, construct high-speed trains and take steps to cool inflation while simplifying tax and investment rules, President Pranab Mukherjee told lawmakers in New Delhi on June 9.
Modi has addressed more than 400 rallies across India since September, emphasizing economic issues such as jobs, infrastructure and inflation.
“He is the first politician in the country who has fought elections on an economic agenda,” Choksey said in his office at the Jeejeebhoy Towers, home to BSE Ltd. “He has a plan and knows how to execute it.”