Carmignac: India election result

Carmignac: India election result

June 6, 2024

Politics India
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After a seven-week election, Narendra Modi is likely to be sworn-in this weekend as India's prime minister for a record third time. Although in this term, he will be dependent on support from his coalition partners.

One of the reasons Modi has been such an effective leader is that his party had a simple majority. The market, or businesses, never had to worry about a coalition partner obstructing any particular reform or legislation. And his pro-businesses policies and fiscal orthodoxy have undoubtedly supported India’s strong recent performance.

Luckily for Modi, his two largest coalition partners (N Chandrababu Naidu and Nitish Kumar)  are both reform-oriented politicians with a long track record of collaborating with the BJP. Both were part of the NDA coalition with Modi's mentor, Atal Behari Vajpayee  (Prime Minister from 1999 to 2004). That coalition is remembered for economic and governance reforms that laid the foundations of India’s decades-long economic growth.

Nevertheless, managing a coalition could somewhat slow down the government’s pace of execution. To ensure he can continue with his ambitious economic agenda, Modi will need to channel his mentor Atal Behari Vajpayee who espoused 'coalition dharma'.

While the election results are certainly a dampener for the markets and sentiment in the short term, they also showcase that India is a true democracy. And with Modi at the helm, it seems likely the next phase of economic development will proceed and the long-term investment case for India, for now, remains solid.

Increased capital allocation from global investors is likely to be a catalyst for future growth. To date, investment in India’s stock market and bonds has been overwhelmingly domestic, but there are two events likely to shake this up: the inclusion of India in JP Morgan’s widely tracked emerging markets government bond index, starting June 2024; and the inclusion of eligible Indian bonds in Bloomberg’s emerging market local currency index, from September 2024.

According to our estimates, these two events could bring in up to US$40 billion in new foreign investment. As international investors become more familiar with the country, the ‘halo’ effect should transfer to equity markets.

This capital boost, combined with Modi’s pro-business stance and a well-managed domestic financial system means Indian markets are poised to continue their upward march. However, with valuations already high, and a less certain political landscape, volatility may increase, so selectivity is becoming more important.

In our view, small- and mid-cap firms will benefit from a likely capex upcycle, as well as the financial services, high-end manufacturing and real estate sectors. The most disruptive businesses, with the highest potential for rapid growth will emerge on top thanks to a highly supportive ecosystem for budding companies.

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