Has Modi Lived Up to the India Investment Hype?

Investors backed Indian equities following the appointment of Prime Minister Narendra Modi in 2014. But reforms have been slow to materialise

Emma Wall 9 October, 2017 | 12:10AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Robert Horrocks, CIO of Matthews Asia.

Hello, Robert.

Robert Horrocks: Hi.

Wall: So, we're here today to talk about India, because it has been one of those markets around which there has been significant hype over the last couple of years. Modi came into power, unifying a government, which had up until that point been fractured, and investors were extremely excited about what this might mean for markets. But it hasn't quite come up and lived up to that hype, has it?

Horrocks: Well, India has done very well apart from the last year or 18 months or so. But yes, I think, a lot of this was focused on Modi. Probably not quite right to focus all of the achievements that have taken place in India on one person.

Wall: And what is it about him that has perhaps captured the imagination of investors and therefore failed to come through in the way they might have expected?

Horrocks: Well, partly is his track record in his home province of Gujarat and partly it's his own PR efforts. He has been very good at going to the West Coast of the United States and focusing on technology issues, been very good at making those reforms that hit the headlines. But you got to remember he is the head of a central part of the government and he has to contend with all the states and the local governments. And that often means things move a little more slowly than you'd like.

Wall: Because in emerging markets there is – there seems to be a much greater link between politics and markets, where in developed markets the two things can be less connected. Does this mean that we should stop concentrating on Modi so much in terms of trying to predict what the Indian stock market will deliver?

Horrocks: I definitely think you shouldn't concentrate just on Modi. The reason for the connection between politics and the economy and the markets in India in particular is they are where China was 20 years ago. They need to build up the infrastructure. These are the things that governments are supposedly doing very well. So, that's the reason for the linkage.

Now, Modi has done some things very well indeed. He has put in place a demonetization which I think I would said this would have had a much more detrimental impact on the economy in the short term. He has done some changes to the legal infrastructure to make bankruptcy law a little bit more clear. But these are things that take time. You know, you have a bankruptcy law in place but do you have any bankruptcy lawyers to train yet?

The other thing I would mention is the achievements of the central bank. India used to be a high inflation economy. It was spending more than it saved. And the actions of the central over the last five years have brought that core inflation rate right down to a level where India's savings are now pretty much able to mobilize all the investment it needs in the economy. The inflation rate is very reasonable even for a developed nation. So, it's not just Modi. India has done quite a few things right.

Wall: And with those few things in mind, with that positive central bank policy and indeed, the longer-term positive structural trends that Modi does seem to be actioning, where then are the greatest opportunities for you as an Asian investor?

Horrocks: You still have to focus on the management of the business, you still have to look at the businesses that allocate capital properly. One of the issues with India at the moment is still is the fact that capital is scarce relative to other countries in the region. So, companies have to retain that capital themselves. That means you are putting a greater degree of trust in the management that they are going to look after that for you. So, that's really the key. But India is a market there's opportunities across kinds of sectors. So, it's quite a fertile environment for an investor there.

I would say the one element of caution I would have about India at the moment is the valuations. It is one of the more expensive markets in the region. You are right that a lot of hope surrounds Modi and the government and that's been priced in a little bit to the market. So, you just have to be cautious and just pick your spots carefully.

Wall: Do you think perhaps there will be a correction coming then or a reversion to mean because as that sort of hype dies down, that may well be a buying opportunity?

Horrocks: There could. I think the question with Modi is, he was sort of, I was never that good, but I'm not this bad. And there's always a chance for changes in sentiment. I would say the one thing that might be in India's favor is that over the last few years you've seen quite slow earnings per share growth in the economy.

Wages have been raced ahead of productivity. So, corporate margins have been squeezed. I think those earnings are coming back. And with a slightly looser monetary policy that will support the market. Now, whether you get a correction or not, or whether you just go through a damp patch with not much performance, I don't know. But I do think corporate profit growth is still going to be pretty decent over the next few years.

Wall: Robert, thank you very much.

Horrocks: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar