Indian Shares Overreact To Election Defeat

0

Indian stocks had a very rough week. The iShare India 50 ETF managed to decline every day last week; not a common occurrence. There have been several pieces of news causing the country’s stocks to decline. However, the magnitude of the drop seems excessive compared to the actual developments.

Most importantly, a regional election in one of India’s states was a major defeat for Prime Minister Narendra Modi’s ruling party. An alliance of anti-Modi parties took 178 seats in the Indian state of Bihar, while the ruling coalition only secured 58 seats. A big defeat indeed.

Regrettably, this election has been cast by many analysts as a referendum on Modi’s economic strategy. Bihar is viewed as an important state, since it is one of India’s most populous. It hails with more than 100 million citizens. Bihar is also a very poor state, and as such its voters are very motivated by economic policy.

Indian stocks initially tumbled almost 3% following the election results, and the Rupee slumped sharply to a new two month low. Shares tried to bounce, but eventually the general selling tide took over and left Indian stocks submerged.

This election will adds another question to Modi’s authority over the country. Modi’s party, earlier this year, lost an election to a new anti-corruption party in Delhi.

However, the rupee recovered much of the initial losses after analysts began to consider the results more calmly. Most observers concluded that this election will do little actual harm to Modi’s economic reform agenda.

India’s finance minister said there would be no impact to the ruling government’s plans from the election loss.

Investors are unlikely to change their behavior either. Bihar is a backward state that is largely ignored by foreigners.

Perhaps most importantly, the ratings agencies issued statements saying that the election result won’t change their outlooks toward India. S&P in particular reconsidered India but left its rating at BBB- (lowest notch in investment grade) with its outlook stable.

Moody’s is also looking at India kindly. An interview this week with a Moody’s analyst brought us this comment: “We have a positive outlook on India’s rating which really reflects our assessment that over the next 12 to 18 months, there could be a rating upgrade [……] The strength is very much on the economic side for India’s sovereign rating. The weakness are on the fiscal side, with India having a relatively high debt to GDP ratio compared to some of its peers.” She also faulted the weak banking sector, but says things are improving there.

Fortunately, there was also better news, with some commentators now bumping up India’s expected growth rate for 2016 to 8%. The IMF in particular is pleased with how developments are shaping up.

India also is forecasted to grow its economy by up to tenfold over the next twenty years, with some estimating that it will be a $20 trillion economy in 2035. The United States, by comparison, is expected to reach that level in 2018, and China sometime in the 2020s.

The election setback is a concrete negative, and a real disappointment. Poor voters sometimes tend to vote against dramatic policy reforms, such as the ones Modi is enacting, since they require short-term pain to reach the long-term objective.

However, this election should not be viewed as a national rejection of the new economic policy of the country. India is still on a growth-orientated markets-based trajectory, and one election in a regional backwater will not reverse the tide.

The election defeat came at a bad time, as emerging market shares resume their downward push after a recent rebound. China, Brazil, South Africa, and Russia, to name some of the harder hit, all saw shares go into a tailspin last week.

Recent Fed commentary suggests that American interest rates are going higher in December. This will undoubtedly hurt emerging market sentiment in the short run.

India should be relatively unscathed. Among the major emerging markets, it is one of the few that benefits from lower energy and commodity prices.

Short-term volatility has returned, but nothing has fundamentally changed with the longer-run Indian bullish case.

LEAVE A REPLY

Please enter your comment!
Please enter your name here