The NR Eye: NRIs can benefit from poll-driven stock rally

April 14, 2014 - 12:34:03 am

by Moiz Mannan

The tea he sold as a young man might not have found many buyers, but as a favourite for India’s top political job, Narendra Modi’s promise of a pro-business regime has apparently sold well, particularly with foreign investors.

Non-resident Indians (NRIs) whether or not they were able to vote in the Lok Sabha 2014 elections and regardless of their political affiliations, would do well to come on board the Indian equity market at this time when opinion and exit polls are driving the sensitive indices skyward.

Over the past six months or so, as the election fever gripped the world’s largest democracy, poll pundits have been near-unanimous in giving the best chance of winning to the National Democratic Alliance (NDA) led by the Bharatiya Janata Party (BJP).

Love him or hate him, Narendra Modi has been too omnipresent in the media to ignore. His immediate past shows him as a business-friendly ruler, albeit of one Indian state. The implicit and explicit promise is to make it easier and more attractive to do business in and with India if he comes to rule the country.  While sticking to its opposition to FDI in multi-brand retail, the BJP has promised to recharge the economy, improve infrastructure, quicken oil and gas exploration and reform the tax system to attract investors.

Already, India’s two benchmark stock indexes, the S&P Sensex and the CNX Nifty, have each rallied to new highs, defying the weakness in other major emerging markets. The rupee is up over 14 percent since its low last year.

Foreign investors have played a major role in this surge. As the outcome of the elections has become clearer, foreign investors have ploughed more than $2bn into Indian equities in February and March, a reversal from the outflows at the start of the year.

It was the BJP’s success in the provincial elections to four Indian states late last year that apparently inspired some amount of confidence in foreign investors. Ever since those elections, the stock indices have steadily climbed. Spurred by the prospects of a stable and firm pro-business dispensation at the Centre, foreign institutional investors pumped in about $6bn into Indian equities in the quarter that ended in December, according to a report this month by Bank of America Merrill Lynch analysts. The figure stood at $700m in the previous quarter. They have bought close to $5bn worth of stocks since January this year and foreign institutions’ holdings in Sensex member companies were at an eight-year high.

It is the prospect of stable and firm governance that has broken the trend of earlier years. It is unusual for the Indian markets to jump in pre-election months, particularly after 1996 when coalitions became the new political strategy to make up for shortfalls in parliamentary majority. In most election years, the market had actually fallen just before the elections — in 2004, by more than 10 percent. The main reason for the pre-election jitters, obviously, has been uncertainty which was as unavoidable aspect of coalition politics. If investors feel that any single party, in this the BJP, would be in such a commanding position as not to be held to ransom by regional satraps, the markets like it. Further, the marginalisation of the Left parties at the all-India level is probably another factor boosting the sentiment of the foreign investor.

Needless to say, this is a good time for investors who are looking to make some quick gains. Non-resident Indians (NRIs) are advised to look at mid and small caps which have been out-performing the overall indices. The strong performance of mid-caps suggests more investors are now confident of a strong coalition at the Centre led by the Bharatiya Janata Party after the elections, driving up market activity to a two-month high. The average daily turnover in the cash market is at R18,391 crore, the highest since February 2012.

Since mid-February, after the opinion polls started to drive market sentiment, the 30-share Sensex has rallied 12.5 percent but the BSE Mid-cap index has gained as much 16.3 per cent. Both in 2004 and in 2009, the Mid-cap index had outperformed the Sensex by an average five percent a month ahead of elections.

Kishor Ostwal, CMD CNI Research, was quoted by Business Standard as saying, “The best performers will be the mid-and small-caps, which are still languishing as compared to the large-cap peers. I feel the FIIs will turn their attention to the mid-cap and the small-cap segment very soon.” 

Analysts at Angel broking have said in a recent report that “Banks, Auto, Capital goods, Infra and other cyclical sectors are all likely to benefit substantially from an economic upturn, policy reforms and declining inflation. Moreover, these sectors are still trading at highly beaten down valuations making it an ideal time to invest in them.” 

At the same time, investors should be aware of the volatility that political upheavals bring to the market. As we mentioned earlier, the time is ripe to make quick gains and then sit back and watch a bit.

When the BJP-led National Democratic Alliance had come to power in 1999, the Sensex jumped 6.4 per cent in the three months following the elections. But the euphoria did not last long. In the one year after the elections, the Sensex dropped 13 percent. The market trend was different in 2004 when a Congress-led coalition formed the government. That is because it had to rely on the communist parties to remain in power. In the first three months, the Sensex was down 6 percent, though over the year it was up 16 percent.

This time, experts opine, the present rally may not continue for long and the market is more likely to move sideways. If the BJP comes to power, the Sensex is bound to jump.  However, over a longer period, it is possible that the Sensex can slide, depending on what a new government can deliver. 

A recent Nomura report stressed that in the months after the elections, the market ultimately tends to reflect economic realities. India’s economy still faces challenges, and the underlying structural problems won’t be easy to fix, even if a new government takes over.

The Peninsula