India on right path despite sluggish reforms

When Narendra Modi swept to power in the 2014 India election, promising to rejuvenate the economy, implement much-needed reforms and bring an end to corruption, many heralded his victory as the start of a new dawn for India. 

But a year later it has not all been plain sailing. Growth has recovered and the S&P BSE Sensex share index has risen 22.4 per cent in the past year, yet pace of reform has not matched expectations, with, for example, the government unable to push their goods and services tax bill through parliament.

“The Indian public is getting a bit restless with Modi,” says Rahul Chadha, co-CIO of Mirae Asset Global Investments, the Asian emerging market equity specialist which has $66bn (Ä59bn) in AuM. “People thought that he would come in and solve all the problems. Modi is not a superhero but he has been given this larger than life status.”

He highlights the recent controversy surrounding the hit-and-run case involving Bollywood actor Salman Khan, where some people seemed to think Mr Modi should have ignored the judicial process and weighed in personally to resolve the long-running saga. 

Following the election, almost all global investors were overweight India, says Mr Chadha. “You had a lot of hot money in the country. Everyone was bullish. And when China performed, a lot of people took money out of India and moved it there, so that froth is now out of the market.”

Prior to Mr Modi’s ascent to power, Mirae had around 12-13 per cent exposure to India in its Asia Sector Leader fund, largely targeting companies focused on exports. This has now risen to almost 25 per cent, and covers a much wider range of companies, such as those in the banking and auto sectors.

“I would not be surprised if India outperforms China over the next 12 months,” says Mr Chadha. “I would be disappointed if double digit growth didn’t happen.”

The other markets Mirae favours in Asia are Indonesia and the Philippines, while urging caution over Malaysia and the political situation in Thailand.

In China, Mr Chadha expects to see a “policy bazooka” from the central bank. “The bank is clearly in something of a panic, which is why you have had three rate cuts in six months. The government has enough gunpowder to stabilise growth but the road ahead is getting tougher.”

Investors need to get used to a world in which Chinese growth settles at around 4 to 5 per cent, and then to position portfolios to take advantage of structural growth stories, such as the rise of the internet and healthcare.

Hong Kong listed China shares are trading at attractive valuations and a sizeable discount to ‘A-share’ valuations, says Peter Sartori, head of Asian Equity at Nikko Asset Management. “The ongoing reforms in China, on top of further traditional monetary policy easing, will push China shares over 2015,” he says, adding that many global investors are not well positioned for the China bull market and are still to enter the market. 

Nikko is “mildly positive” when it comes to India, believing the reform process is slow but underway, and that the long-term potential remains. “Most global investors are already well positioned for an Indian bull market, and this is the main reason we are only mildly positive,” says Mr Sartori.

What is clear is that the India versus China allocation weigh-in should introduce one of the most intriguing heavyweight battles of the 21st century.