Global Funds Loving India Again as Modi Proves His Reform MettleBy and
Ashmore said it will increase India exposure if levy cleared
High stock valuations limiting upside in the near-term
Money managers including Ashmore Group Plc and Prudential International Investments Advisers LLC have a new rationale for an old favorite trade: Prime Minister Narendra Modi’s biggest legislative victory since taking office in 2014.
Lawmakers on Wednesday unanimously approved the creation of the goods-and-services tax, or GST, that would create one of the world’s biggest single markets. The tax, which has been a decade in the making, is seen benefiting industries such as cement, logistics and automobiles by easing the movement of products across state borders. Finance Minister Arun Jaitley has said it will add as much as 2 percentage points to economic growth.
The bill’s passage will burnish the appeal of Indian assets for global funds, that bought a combined $2.7 billion of stocks and bonds last month, according to Ashmore and Aquarius Investment Advisors Pte. It would also strengthen the Modi government’s credentials of being able to push through difficult legislation in a nation that’s been criticized for its slow pace of reforms.
“We will increase exposure,” if GST is cleared, said Jan Dehn, London-based head of research at Ashmore, which oversees about $51 billion in emerging markets. The tax “should lead to economies of scale in production, lower costs and ultimately higher growth.”
Mirae Asset Global Investments Co., which oversees about $83 billion in assets, is buying Indian government notes, while GAM International Management Ltd. sees “plenty of scope” to increase its holdings in India.
The benchmark S&P BSE Sensex index of shares was little changed on Thursday. The gauge last week capped a fifth month of gains, the longest run since 2014, while sovereign bonds surged the most since 2013. The rupee strengthened 0.1 percent to 66.94 a dollar, rising for the seventh time in eight days. The yield on government notes due January 2026 fell two basis points to 7.17 percent, still the highest for 10-year debt among major Asian markets.
Industries where indirect duties are high, such as appliances, autos, consumer staples and home-building products, are likely to benefit from the tax, said John Praveen, managing director of Prudential International. Apparel, retail and textiles may be hurt, he said.
The Sensex has declined in the last four sessions as expensive valuations are seen curbing further upside in share values. The S&P BSE MidCap Index reached a record earlier this week. The rally lifted the gauge’s price-to-earnings multiple to 32, a level seen in January 2008, a year that saw Indian stocks suffer their worst-ever annual loss.
“We would not get incrementally bullish even if the GST is passed as valuations are still not comfortable,” Mihir Vora, chief investment officer at Max Life Insurance Co. in Mumbai, said in an interview. The insurer, which has $5.4 billion in assets, already owns shares of cement companies, automakers and logistics firms, businesses that are expected to gain from the tax, he said.
Besides, the benefit from the GST will reflect in company profits over the next 18 to 24 months, Sanjiv Bhasin, executive vice president of markets at the IIFL Holdings Ltd., said by phone from New Delhi.
For offshore investors, the bill’s passage is as much about the trajectory of the nation’s economic reforms as it is about the benefits to industry. Since taking office in May 2014, Modi has expanded foreign direct investment in sectors such as airlines and railways and overhauled a century-old bankruptcy law.
“The GST proves it has been possible for the Modi government to achieve what for many years appeared an impossible task, and should deservedly grab some headlines,” said Caroline Gorman, a London-based investment manager at GAM. “Taking a medium-to-long term view, we may be more likely to raise our exposure to Indian assets to the extent the implementation of the GST should raise the nation’s long-term growth rate, all other things unchanged.”
The constitutional amendment approved late last night now has to be endorsed by the Modi-controlled lower house and then ratified by at least half of all states, a process projected to be concluded before the year ends. Nonetheless, India is now on track to move forward with a reform that had been delayed for years due to political bickering.
“GST’s clearance sends a strong message to the global investment community,” said A.S.T. Rajan, a senior managing director at Aquarius Investment in Singapore. “It increases the attractiveness of India as an investment destination.”
— With assistance by Subhadip Sircar, Nupur Acharya, Candice Zachariahs, and Santanu Chakraborty