Emerging-market bulls tout Modi premium as election nears

Under Prime Minister Narendra Modi, India’s stocks have commanded an unprecedented premium to emerging-market peers. As he seeks a third successive term, investors are betting that the performance can continue.

Modi is likely to spend heavily on manufacturing and infrastructure should he win, continuing a strategy that wooed money managers during his decade in power. The stock market has rallied to successive records, while India’s imminent inclusion in a major global bond index is expected to lure billions of dollars in inflows.

A “pro-growth, pro-market agenda” is being endorsed by the electorate, said Andrei Stetsenko, a New York-based portfolio manager of Farley Capital. “To a much greater degree than a decade ago, the company managements with whom I meet feel the government is on their side.”

Modi’s 10 years in office have ensured political stability and policy continuity, helping reduce extreme swings in asset prices and turning India into a preferred investment destination for global funds. The election will start, in phases, on April 19.

When votes are counted on June 4, it will all boil down to whether or not Modi’s party wins a clear majority in the legislature. He has predicted a tally of more than 400 seats for his Bharatiya Janata Party and allies, though it remains to be seen whether the electorate’s top concerns over lack of jobs and high inflation, as highlighted by a recent poll, weigh on his popularity.

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In 2019, the alliance led by the BJP won more than 350 of the 543 seats in the lower house of Parliament.

“Modi has unlocked India’s potential,” said Mike Sell, head of global emerging equities at Alquity Investment Management Ltd. “Investors prefer stability and clarity. A majority government versus an unwieldy coalition would certainly be preferable.”

Here is a deeper look at how Indian assets have performed under Modi:

Equity Premium

The median premium paid by global investors to own Indian shares against buying equities in other EMs jumped to 54 per cent under Modi’s tenure, from 30 per cent during the previous regime led by the Indian National Congress, data compiled by Bloomberg show. 

In contrast, stocks in China witnessed a median discount of 4 per cent to peers during the last decade, reflecting the diverging fortunes of the world’s two largest emerging markets.

In terms of absolute returns, the MSCI India Index’s surge of almost 200 per cent under Modi looks tamer in comparison to the more than 300 per cent rally the index saw in the previous decade.

Investor confidence in Indian markets still seems to have grown under Modi, with volatility plummeting across asset classes. For stocks, the median 30-day volatility in the benchmark NSE Nifty 50 Index dropped to 13 points over the last decade, from 18.5 points in the previous comparable period, data compiled by Bloomberg show. 

“India offers a strong protection on downside in terms of volatility,” said Vivek Dhawan, portfolio manager at Candrium Belgium NV. “In the last two-to-three years, there were a lot of headwinds — geopolitics, interest rates going higher and all that — but that meant India’s appeal due to its low volatility increased.”

Rupee’s Calm

While the Indian rupee steadily depreciated during Modi’s two terms, volatility in the currency has petered out in recent years, making it a favorite among carry traders.

The central bank has kept such a tight grip on the rupee that expected swings based on options prices have fallen the most in the world over the past decade. That’s a big change from the prior 10-year period, when the rupee was one of the most volatile currencies.

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Currency stability in turn has boosted the attractiveness of the nation’s sovereign debt for foreign investors, with Indian bonds seeing the longest monthly streak of inflows in almost a decade ahead of their inclusion in major global bond indexes. 

A Bloomberg gauge of India’s benchmark sovereign bonds has given positive returns in all 10 years of Modi’s tenure, and looks set to edge higher if he retains power.   

“India is defying the EM wisdom of at least one step back for every two steps forward,” Macquarie Group Ltd.’s Viktor Shvets and Kyle Liu wrote in a note dated April 8. “India is likely to continue on its gravity-defying path, with less inflation, stable growth and lower risk premia.”

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