I agree with The Economist that India and Indonesia are the two shining stars of Asia and both are due for historic elections where the outcome is preordained, as capital markets metrics and fund flows I track discount in real time now. Prime Minister Modi will win the Indian general election with a decisive majority in the Lok Sabha. This is not just a prediction but Dalal Street’s collective consensus now that Nifty is 21000. Yet I have learnt the hard way that the Indian electorate is fickle to incumbents, so a victory for the opposition coalition with Rahul Gandhi as PM will trigger a catastrophic 25 to 30% plunge in the index, a probability that I do not consider credible but will defer to my Indian friends as their political antenna are far more nuanced.
There are multiple reasons why Western fund managers continue to overweight India in any EM. One, India is not China, which is now mired in its own lost decade of debt deflation due to its $5 trillion dollar real estate black hole. Two, Indian GDP growth in fiscal 2024 will be 6%, making it the fastest major G20 economy. Three, J.P. Morgan’s inclusion of Indian bonds in its EM bond indices will boost offshore fund flows into G-sec market on Dalal Street, though India is no longer a fragile five economy dependent on speculative hot money from abroad, as it was when the Bernanke Fed triggered a taper tantrum and a rupee/Sensex hit in 2013.
Four, the Indian economy has dramatically lowered its “oil intensity” as reliable electricity in its 600,000 villages reduce the need for diesel generators and GST cuts fuel wastage by trucks held up at interstate border crossings. In any case, the price of oil has fallen 25% in mid-October, a talewind for Indian economic growth. Five, RBI smoke signals suggest that we have seen the peak in the repo rate in this interest rate cycle even though I do not buy Wall Street’s take about the 100 basis point cut in the Fed Funds rate priced into the money markets futures curve. Yet two RBI rate cuts are a reasonable prospect that the market now prices-in.
Six, the BJP is not complacent about the popularity of its incumbent PM or the track record of its seminal economic reforms during the past decade. So expect a surge in infrastructure spending and new construction before the election, which makes the cement sector a must own since it is a non-tradable item with pricing power. Should Gujarat Ambuja be our sector pick here?
Seven, corporate India’s new capex cycle and leverage ratio expansion could definitely raise the profit/GDP ratio by two full points in the next three years. This means 18-20% earnings growth in 2024-26. With exports to GDP at only 20%, India is a de facto domestic growth stock and priced accordingly.
Eight, AI, like the public cloud, is a winner for software centric Indian IT firms. Nine, secular credit growth is an EPS goldmine for private megabanks, led by HDFC as the Godzilla principle was activated by its reverse merger – size matters!
Also published on Medium.
