Wealth managers have sought to find the bright side of the outcome of the Indian elections last week. Barring major upsets, the BJP has a clear mandate for government.

Wealth managers are happy about the outcome of last week's Indian elections, which as of the time of writing saw opposition leader Narendra Modi and his Bharatiya Jahata Party decisively take power. The party has a lead of 272 seats in the lower house of parliament, defeating the Congress Party that has held power for much of the post-war period.

“It is a historic victory. Modi basically had a one-point agenda, development, and he was backed by people from all backgrounds,” Avinash Vazirani, manager of the Jupiter India Fund, said in a note.

“With an overwhelming majority, the BJP should be able to get things done. For the first time ever a single party at state level will rule all the way from Delhi to Mumbai,” he said. “There will be a clear focus on infrastructure and development. Cutting red tape will be a priority. I am expecting a simplification of the tax system, a cut in capital gains tax and dividend tax, and an introduction of GST (the Indian VAT), which has been held up for years. We should also expect privatisations, with sales of government stakes in private companies,” he continued.

“The BJP has said it is against `tax terrorism, in reference to Vodafone and other cases.  In my view, they will deliver on that, and we will get back to a stage where companies will be able to plan ahead rather than depend on government. As I have said before, Modi does not have a magic wand. But many of these things are low-hanging fruit. They can be done by a clear and decisive leadership, which the country lacked and now has,” Vazirani said.

“One of Modi’s biggest promises is that there will be continuous power, water and sanitation across the whole country. If he sorts out power, he will have sorted out all the problems with public sector banks, and more of their funding could be devoted to infrastructure spending,” he added.

According to Baring Asset Management, Modi is a “popular, reformist and business-friendly” chief minister of the state of Gujarat.

“Positively, we expect this will help to bring an end to the instability and legislative paralysis that has stymied reform efforts in recent years,” according to Ajay Argal, investment manager, Baring India Fund, Baring Asset Management, Hong Kong.

“In the coming days and weeks, investors will be watching to see the composition of the next government, which ministers will be appointed to key positions and how large the cabinet will be overall. In our view, a smaller cabinet would indicate that Mr Modi is opting for a stronger and more decisive government,” Argal said in a statement.
Seeking a boost
The elections have been held at a time when India, the world’s most populous democracy, has been seen as losing some of its economic momentum. Last Friday, Indian equities rose slightly; a report at Bloomberg noted that the value of Indian equities has climbed by more than $330 billion since 13 September when the BJP named Modi as its candidate for prime minister. Since the start of January this year, the MSCI India Index of equities has generated total returns (capital gains plus reinvested dividends) of over 8.8 per cent. In 2013, that index fell 3.8 per cent. There are hopes that the new administration will galvanize growth with developments such as supply-side reforms.

“Once formed, we expect the new government will move early to capitalise on the momentum of its victory to push forward a policy agenda that includes a raft of reforms to improve social equality, governance and the overall economic and business environment. That said, Mr Modi is likely to take a pragmatic, long-term view with his plans for reform. He has continually employed the slogan “Give me 60 months” throughout the campaign, and he may even be thinking longer term than this,” Baring's Argal continued.  

“We are encouraged by the election result and believe that it supports India’s economic growth story. After a period of exuberance surrounding the election, we may see consolidation in the Indian equity market over the short term as investors adjust to the post-election landscape. The immediate reaction of the market was to rise on the news of the election result, followed by a degree of profit taking. Regardless of such short-term movements, it is our view that the economy and financial markets will benefit from an economic upturn over the next 18 to 24 months,” Argal concluded.

Sam Vecht, who manages the BlackRock BSF Emerging Markets Absolute Return Fund, said of the result: "Narendra Modi and the BJP's stunning election win has rightly been hailed as the beginning of a 'New era' for India. He and his party will have a mandate to reform and change the country that no other government has enjoyed for a generation.”

“We are long term bulls on India, given its entrepreneurial culture, industrious workforce and high savings rate. The currently low level of financial penetration and GDP per capita leave plenty of room for future growth,” Vecht said.

“We further increased our exposure in summer 2013 when many in the market were concerned about India's current account problems and a falling Rupee. At that time, and now, our preference is for domestic cyclicals and stocks, especially state owned enterprises that would benefit from meaningful governmental reform. We note that many of these stocks have gone up substantially in the last nine months, but they continue to offer value and are much preferred to the exporters and defensive consumer names,” he said.

“We think that truly changing India's business culture is a monumental task, and one that is unlikely to be achieved in the market's all-too-often myopic timeframe. As such, while we retain a positive view for now, the appearance of excessive euphoria about India's short-term prospects would lead us to trim positions,” Vecht added.

Steven O’Hanlon, head of fixed income at ACPI Investment Managers, said of the result: “We believe it represents a decisive mandate for growth and investment over subsidies and inflation - features of previous regimes. The clear mandate given to the BJP party, we believe can provide the type of stability in government not seen in India for a long time. Together with a strong RBI, this can create the conditions for sustainable growth for India.”

“The current excellent management of the central bank and India’s improving fundamentals means the country’s bond market once again merits interest. For those who have already invested, after quite a few dark quarters, the promise of an investment in Indian fixed income is once again looking bright. The policy errors of the recent past seem to be behind us and with a new government overtly committed to continuing growth the hope is that this will continue,” he said.

At Lombard Odier, the Swiss bank, it was fulsome in its reaction to the result. The reason to suppose reform changes will be made - and hopefully succeed - is for four reasons, it said: BJP dominance in office will last for longer than many assume; Modi's tasks are "clearly defined for him" and markets will force him to act; the government and central bank are well placed to win the trust of markets, and finally, medium-term trends will help India's external balance. "All told, we believe India is still a compelling bet for long-term investors," Lombard Odier said in a note.

(Editor’s note: It is early days but so far, the result suggests India may see more pro-reform momentum, although there have been false dawns before. From the point of view of our own wealth management industry, it will be important to see if the new administration tries to ease restrictions on, say, the ability of foreign-headquartered banks to do business in this country. Despite some liberalisation, India in some ways remains a challenging way to do business.)