Despite the recent victory of the Congress in Karnataka, the “overwhelming view remains that Narendra Modi and the Bharatiya Janata Party (BJP) government will be re-elected in the 2024 general elections, albeit perhaps with a reduced majority", according to Chris Wood of global investment banking firm Jefferies.
In the 2019 elections, the BJP won 303 of the 543 elected seats in the Lok Sabha. This time the educated guess of pundits is around 270 seats.
What about the Karnataka defeat? “The view is that in state elections, local issues tend to dominate. Indeed the track record is that Karnataka has not re-elected an incumbent government since 1985. But in a national election the electorate votes on the big issues and here the dramatic changes brought about by Modi after 10 years in power have been phenomenal," Wood wrote in his GREED & fear newsletter.
‘SURGE IN POPULAR ASPIRATIONS, INDIA’s SELF-CONFIDENCE’
“The reality is that there has been a massive surge in popular aspirations since Modi was first elected in 2014 and also a related massive increase in India’s self-confidence as a country," the newsletter said. “Just as GREED & fear noted recently that the Chinese people post-pandemic no longer have an unbridled confidence in the future of their country, the reverse now applies in India amidst much fashionable talk, which is no longer completely far-fetched, of India becoming the major beneficiary of production being moved out of China in the next ten years."
Citing an example, Wood wrote: “Certainly Apple’s CEO Tim Cook, who has as urgent a need to diversify out of China as anybody given the ongoing geopolitical tensions, went to great lengths to highlight India in his most recent quarterly earnings call on 4 May. He mentioned the country no less than 20 times, not only as regards to its importance as a growing consumer market for iPhones but also as a growing source of production. Meanwhile, Apple has just opened its first two retail stores in India in April, one in Mumbai and one in Delhi."
He added: “The other way India’s increased national self-confidence has been manifested on the world stage in the past year and more has been as regards its purchasing of cheap Russian oil. Despite initial pressures from Washington on Delhi, the Modi government has been consistent in its public stance that it will continue to act in its own national self-interest, which is to buy cheap Russia oil. This stance was helped by the understanding that as the next big domestic market for American companies, such as Apple, to target it makes no strategic sense for Washington to pick fights with both Beijing and Delhi."
INFRA & DBT
“One obvious point here is the transformation of physical infrastructure, where the fiscal deficit has in recent years been primarily spent on investing in infrastructure and not on entitlements. The result is that the huge deficiencies in infrastructure, so visible when GREED & fear first visited the country on a business trip back in 1996, have now been largely addressed. This has to lead to an improvement in the return of capital with one example among many the nearing completion of the two dedicated freight rail corridors. This will massively reduce the time moving goods from Delhi to Mumbai, for example, from at least 24 hours to 12-15 hours. At present bulk commodities are largely moved by roads with the exception of coalwhere rail is more dominant," Wood said.
“The government’s stated aim is to reduce the cost of logistics from the current 14-16% of GDP to 9% in the next three years. If the infrastructure upgrade is one big positive change, another which impacts everybody is the distribution of targeted welfare via the use of technology and the successful exploitation of combining the Aadhaar electronic ID card developed during the previous Congress government with the Direct Benefit Transfer (DBT) scheme," the newsletter said.
CONSTRUCTIVE VIEW
“The most obviously positive point, from a stock market standpoint, is that the monetary tightening cycle is all but over with inflation falling in recent months. Headline and core CPI inflation have declined from 6.5% YoY and 6.1% YoY in January to 4.7% YoY and 5.2% YoY in April, while the Reserve Bank of India kept its policy repo rate unchanged at 6.5% in its last monetary policy meeting in April (see Exhibit 1). The expectation is that inflation should run around 5% for the rest of this year which is below the upper band of the RBI’s target, namely 6%," Wood wrote.
MINI DEMONETISATION
“There is no monetary policy angle to the RBI’s decision announced on 19 May to withdraw all Rs2,000 banknotes from circulation by 30 September, though the notes will continue to be legal tender. The existing Rs2,000 notes can be deposited into bank accounts in the usual manner or exchanged into notes of other denominations at banks with a limit of Rs20,000 at a time," the newsletter said.
“This mini-demonetisation, as it is being called, is officially being rationalised on the anti-corruption angle. But there is also a political motivation on the part of the incumbent BJP government in terms of opposition parties’ funding activities. Elections are financed in India by godowns stuffed with cash," Wood wrote.
CONSENSUS
One obvious worry over the next 12 months will be the inevitable questioning of the current consensus, namely that Modi will be re-elected. Another potential risk is a further reduction in retail investor activity following a period when the stock market has traded in a tight range. Active brokerage accounts have declined from a peak of 38m in June 2022 to 31m in April 2023.
Still the Indian domestic asset management story in the big picture remains probably the most exciting globally given the obvious issues in China. The ongoing inflow into domestic equity mutual funds, most of them via the Systematic Investment Plans (SIPs) deducted monthly from salaries, have been the key reason for the resilience of the stock market during the recent monetary tightening cycle, the newsletter said.
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