Indian PM Narendra Modi is set to retain power following the general election, but his BJP party lost its outright parliamentary majority for the first time in 10 years.
The biggest takeaway is that the perceived risk of a disruptive result of a hung parliament or the spectre of another election is now over. While the BJP was unable to reach a majority alone, they still managed a comfortable majority with their core allies which means that we should see a continuity of government and PM Modi, says Abhinav Mehra, portfolio manager at Chikara Investments and co-manager of the Chikara Indian Subcontinent Fund.
This may have been a political shock, but it bodes well for Indian equities, especially the domestically focussed stocks we invest in. Domestic consumption stocks have been the best-performing pocket of the market since the results.
We believe the new government is likely to counter the narrative that a rural slowdown in UP and Maharashtra hurt their prospects in the election by focussing more intently on ensuring domestic growth and consumption keeps growing. Oil prices back below $80 creates the room for this near-term stimulus boosting consumption and credit growth. This may come at the cost of market areas reliant on aggressive infrastructure roll outs, where we’re likely to see expectations tempered.
Longer term, we may see an increased volatility in the next 5 years than in the previous term. We believe economic reforms – the most challenging of which, in our view, were implemented in their first term (2014-19) – will be prioritised, with that the more disruptive socially divisive reforms (i.e. Uniform Civil Code, One Nation One Election) put on the backburner.
As long as the strong growth rate from the positive capital cycle continues undisrupted, the long-term outlook of Indian equities remains robust – especially compared to so many economies that are highly levered and ageing. Against this backdrop, many would envy India’s fundamentals of >8% GDP growth, a clean banking system driving a cyclical uptick in credit and property, stable inflation and a macro environment with pockets of reasonable valuation across the market.
By Abhinav Mehra, portfolio manager at Chikara Investments and co-manager of the Chikara Indian Subcontinent Fund
