India’s reforms causing equities turnaround

IndiaIndia could become "a blueprint for emerging markets" if new prime minister Narendra Modi and his government continue to have success with reforms.

Modi's budget is seen as responsible for a turnaround in the Indian equity market and a cause of lower inflation, says Manish Shah, chief executive of Comgest India, part of Paris-based Comgest, an asset management business with around €15.8 billion of assets under management.

The election of Modi earlier this year caused a wave of optimism to poor from asset management houses – and Shah's comments suggest the new leader has not disappointed.

"Modi's budget is a clear break from the previous government's subsidy-based approach and has led to tangible signs of improvement in India's economic conditions, such as lower inflation."

The biggest beneficiaries of the announced changes, he says, are the industrial and infrastructure sectors with the government keen to kick-start pent up investment demand to fight coal shortages, improve rail infrastructure, power generation and distribution.

Shah sees these supply-side reforms as essential for raising standards of living in a country that lacks universal power supply, but he feels financing must be improved in order to attract money for long term infrastructure projects.

"Currently there remains much skepticism regarding the possible effects of reforms and the wider economy at large. However, we believe reform-driven growth could be substantial over the longer term and we retain our focus on this horizon," Shah says.

Adrian Lim, senior investment manager for Aberdeen Asset Management, expressed optimism about the new prime minister shortly after his election victory in May. Lim said: "Modi could well be just the man to revive the economy; he turned Gujarat into an economic success story."

However, the replication of his achievements at a national level is not assured, said Lim. "India is vast and disparate and has a deserved reputation for red-tape and corruption. In addition, the Bharatiya Janata Party (BJP) does not have a majority in the upper house of Parliament, so it will still need to build consensus to change legislation."

Lim cited low levels of growth and high inflation as further potential problems for Modi to overcome but added that equities should continue to do well, especially those linked to infrastructure investment.
In June, Caroline Shaw, fund manager for Courtiers Wealth Management, said: "This year has already seen strong stock market growth for Indian equities. The anticipation of Modi's election was enough to see stock prices rise. From 7th May onwards, whilst the election was in progress, the markets soared."

Avinash Vazirani, manager of the Jupiter India Fund, expressed greater confidence in the country, in his comments following July's announcement of the government's first budget. He says: "The new Indian government's first budget is, in my view, extremely positive. Where previously we have been used to attractive headline announcements but hidden stings in the tail, this time, the small print is impressive and I take an optimistic view of what the finance minister is trying to achieve."

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