Are there reasons to be bullish on India after shock election result?

India’s general election results took everyone by surprise, which unleashed volatility for its stock market. In turn, India-focused funds and investment trusts saw values decline, with Jupiter India posting a one-day loss of more than 9%. 

Ahead of the election results, announced in early June, it was widely expected that Narendra Modi’s Bharatiya Janata Party (BJP) would win a third term in office and retain its majority. While Modi won, the party lost its parliamentary majority. As a result, Modi is now in a less-dominant position and requires support from allies to push through policies. India’s stock market sold-off in response to the unexpected result.

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India’s stock market has since settled and has been recovering from the sell-off, but the question now is whether India’s election result has changed the investment case for having exposure to the country.

Gaurav Narain, manager of India Capital Growth Fund (LSE:IGC), an investment trust, says despite Modi’s victory being “well below expectations and even lower than the verdict in 2019”, he expects the government to continuing building on its economic reforms, which have boosted the attractiveness of investing in India.

Narain said: “While we expect policy continuity, with the government continuing its investment-led economic agenda, it may tweak priorities to support rural consumption and employment. 

“A challenge the new government [faces] is that it needs support from its coalition partners in decision-making. This constrains it in making bold reforms, particularly in areas of agriculture law and labour reforms. It may also steer away from contentious issues like implementing a uniform civil code.”

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Political shock, but long-term outlook robust 

Abhinav Mehra, portfolio manager at Chikara Investments, notes that while the BJP was unable to reach a majority alone “they still managed a comfortable majority with their core allies, which means that we should see a continuity of government and Prime Minister Modi.”

Mehra adds that while this may have been a political shock, the long-term outlook for Indian equities remains robust.

“Many would envy India’s fundamentals of more than 8% GDP growth, a clean banking system driving a cyclical uptick in credit and property, stable inflation and a macro environment with pockets of reasonable valuation across the market.”

However, he cautions that due to the election result India “may see an increased volatility in the next five years than in the previous term”.

“We believe economic reforms – the most challenging of which, in our view, were implemented in [the party’s] first term (2014-19) – will be prioritised, with the more disruptive, socially divisive reforms (i.e. Uniform Civil Code, One Nation One Election) put on the back-burner,” says Mehra.

Appearing on our On The Money podcast in May while the election was taking place, Narain also made the point that a third term for Modi would mean a continuation of existing economic reforms. He said the focus would be more about tweaking policies, rather than coming up with new ones.

Narain said three big changes have been making India’s tax system much simpler, reforming the banking system, and introducing real estate regulations.

He said: “The reforms have transformed the India economy because in many sectors consolidation has happened, with the weaker players falling through. Today, you have a scenario in which corporate balance sheets are the strongest ever, which has provided the whole platform for the growth (in India’s economy) you are seeing today.”

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Another example of positive change, highlighted by Narain, is that technological advancements have made it easier for India’s own citizens to invest in the country. He says this has translated into more money being invested in India’s mutual funds, which has the added attraction of being stickier than money invested by overseas investors.

At interactive investor, we have seen a notable increase in investor appetite for India. Trading volumes (by value) into India-centric funds, investment trusts and exchange-traded funds on the ii platform have risen 26-fold over the past two years to 30 April 2024, and 21-fold over the past year alone.

India is the most-popular emerging market region for investing among ii customers, attracting more money than China, the next most-popular region. Nineteen of the past 24 months have seen net outflows from China, compared with just two for India, which boasts 22 months of inflows.

The investment case for India 

The attractions of investing in India are well known. It is one of the largest and fastest-growing economies in the world, bolstered by a suite of business-friendly reforms enacted by Modi. It has favourable demographics, with a young population and a growing middle class. Half its population are under the age of 25.

Political risk is considered to be lower than in other emerging markets, with the surprise election result not changing that view.

Instead of the unexpected election result being seen as a risk, the expensive valuations for its stock market potential pose more of a problem for new investors. Historically, India’s stock market, on the one-year forward price-to-earnings (P/E) measure has traded on a multiple of 17/18 times. It is now trading on 21/22 times. 

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Narain acknowledges that India’s stock market is expensive, relative to both its own history and other emerging market regions, but he argues that “India is delivering on the growth and the expectation on growth sustaining over time is very high.” Therefore, his view is that the more expensive price tag attached to India is justified.

For investors looking to invest in India, it is important to bear in mind that as this is a higher-risk area, exposure should be treated as a satellite rather than a core holding. The main options are to invest in a dedicated India specialist fund, or to have broader exposure to India through an emerging market fund. Options include Pacific Assets (LSE:PAC) and JPMorgan Emerging Markets (LSE:JMG), which hold 43.5% and 24% in India respectively.

For adventurous investors, Stewart Investors Indian Subcontinent Sustainability offers India equity exposure with a sustainability focus. The fund aims to invest in the highest-quality companies run by responsible management teams.