Will Indian elections disrupt the reform agenda?

By Kristy Fong, Investment Director, Aberdeen New India Investment Trust PLC

India has general elections looming. Markets have seen an impact from wobbling poll ratings for incumbent, reformist Prime Minister Narendra Modi. Should investors be taking note?

At the start of the year, the MSCI India Index performed poorly relative to regional Asian markets on fears of a disappointing election outcome
We aim to find companies that do well in spite of government policy, rather than because of government policy
Total consumer spending in India is expected to hit $3.1 trillion by 2030, from $1.4 trillion in 2017

Earlier this year, the MSCI India Index struggled to make progress while other Asian markets forged ahead as investors feared a disappointing election outcome. These fears have subsided somewhat over the past few weeks. The recent tussle with Pakistan has played in Modi’s favour as he remains the ‘strong man’ choice. The recent run in markets reflects rising optimism that Modi and the Bharatiya Janata Party (BJP) will be returned to government with a sufficiently high mandate to continue their reform agenda.

Of course, political events such as these are not easy to predict. As we see it, even if there is a change in government, it should not derail the reform agenda. The changes that have happened under Modi, such as the insolvency and bankruptcy code or the Goods and Services Tax, are only just starting to be felt. While there is unquestionably more that could be done, India’s economy is likely to reap the benefits for some time.

That said, we prefer that our portfolio is not buffeted by the ebb and flow of political events. Instead we aim to find companies that do well in spite of government policy, rather than because of government policy. That way, government policy becomes a nice-to-have rather than a necessity for growth.

Although the Indian economy has been growing at a reasonable pace (7%+) for some years, at the corporate level, fortunes have been mixed. In our view, it is clear that the more compelling growth is in companies focused on domestic growth and, in particular, the growth of the consumer. Consumption growth is underpinned by a young population and an expanding middle class. Total consumer spending in India is expected to hit $3.1 trillion by 2030, from $1.4 trillion in 2017, according to World Economic Forum research. The new middle class will account for nearly 60% of this increase. (1.)

Companies with pricing power and robust balance sheets will be well paced to prosper. Aberdeen New India Investment Trust is a holder of Hindustan Unilever, for example, which has been growing its sales volumes consistently as Indian consumers continue to spend.

We believe the banks should be beneficiaries too. We only invest in the private sector banks that lend to the expanding middle class and are gaining market share at the expense of inefficient and capital-constrained government banks. In the wake of the IL&FS default, tighter liquidity and financial regulations have also meant less competition from the shadow banks. For example, HDFC Bank, which is also held by the Trust, continues to enjoy loan growth of over 20%. When the environment becomes more difficult, those with stronger assets shine.

Cement is another theme in the portfolio. Cement prices increased in February. The sector appeared to be in an upcycle as utilisation levels improved, while demand remained supported by government policy and cost pressures eased. While this may seem an unexciting sector, it is geared into some of these strong economic and consumer trends, such as infrastructure development and affordable housing. Material companies, along with real estate groups, should also benefit from tax and interest-rate cuts. We hold companies such as Shree Cement, Asian Paints and Ultratech in the portfolio.

The recent weakness in the Indian stock market has brought valuations down to more reasonable levels. The country is well insulated from the ill-effects of global trade tensions. Structurally, its large, domestic consumption-based economy is in a good position to withstand external shocks. Growth remains compelling, underpinned by a young population and an expanding middle class. Low, stable oil prices are also supportive. With the election unlikely to cause significant disruption, investors can focus on India’s bright future.

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