Will Modi be a blessing for Indian stockmarkets? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Will Modi be a blessing for Indian stockmarkets? 

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In this issue:
» 'No real estate bubble in India': Keki Mistry
» Is India on the brink of financial reforms?
»  India needs FDI for future growth
» Global economy seeing massive deflationary forces
» and more....


00:00
 
There has always been a connection between politics and the performance of the equity markets. The connection is strong. For politics decide the economic policies. This guides the economy. And this in turn drives the performance of the corporate. The performance of the corporate world decides how their share prices will move or in short where the stock markets would be headed. This is why investors, both domestic and foreign, have been keenly eyeing the developments related to the 2014 general elections in the country. Interestingly the corporate world and therefore the stock markets appear to be rooting actively for Gujarat Chief Minister, Narendra Modi.

Mr Modi's nomination by his political party as their Prime Ministerial candidate was well received by India Inc. In corporate polls and surveys, India Inc has been giving their preference for Mr Modi to be the next leader. And there are solid reasons behind this favour.

Let us not forget that the policy paralysis of the ruling government has seriously hurt the business prospects in the country. Therefore Mr Modi's 'pro-business' ideas are being welcomed. A few days back he held a meeting with CEOs where he stated that he plans to bring about flexible labor laws; a clear cut development agenda; governance and empowering the state governments. This would be music to the ears of the CEOs who have seen their business suffer due to the lack of action on all of these fronts. Luckily for Modi he has a track record to back up his claims of being pro-business and pro-growth. Anyone who questions that need only to look at the level of development and growth seen in Gujarat during his tenure as the Chief Minister. This is why investors both domestic as well as foreign have been cheering Mr Modi's candidature.

However, there is another side to the story. Modi has been touted by many to be a driver of earnings growth but not inclusive growth. On the social indicators' front, Gujarat has not really fared too well. He is not a major supporter of spending too much towards populist measures. Unfortunately for India, the UPA government has been doing just that. Only concentrating on populist measures and letting the economy take a back seat. The glaring deficit problems are testimony to this.

What we need today is a leadership that can combine both. Economic growth that is brought about by better earnings growth that is also socially inclusive. Who will eventually come into power is a question no one can answer for sure. Will it be the pro-business party or would it be the pro-masses party. The question now is what investors should do in a meantime. There are very few clues available for this. Even our founder, Ajit Dayal, has stated in a recent WebSummit he does not see any significant triggers for stocks till the next general elections. So should investors continue to buy stocks or should they sit on the side and wait for elections to get over. We know it is questions like these that concern you these days. And your trusted source for views and opinions, The 5 Minute WrapUp, too has unfortunately not helped by staying silent on such questions. We understand that, in addition to stocks, you might be concerned about other asset classes like fixed deposits, gold and property as well. And that's why we are taking steps to make The 5 Minute WrapUp more relevant to you. Watch this space for more details in the coming weeks!

Do you think Narendra Modi would be a blessing for the Indian economy as a whole and the stock markets in particular? comments or post them on our Facebook page / Google+ page

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01:12  Chart of the day
 
For quite some time now, the real estate industry has been out of favour as far as the investors are concerned. And their aversion to the sector makes sense to some extent. Most of them have stretched their balance sheets to fund expensive and ambitious projects. Higher inflation has brought margins under pressure too. On the top line side things have not been too good either. As buyers feel the heat of higher interest rates and the slowing economic conditions, sales volumes have been declining. As shown in the chart, the picture was not very rosy for the quarter ended June 2013. Sales volumes have come down on a year-on-year (YoY) basis in the residential segment. Barring Chennai and NCR (National Capital Region), nearly all the other key regions have seen sales volumes contracting. As a result, sellers have been offering more incentives to buyers. The major cause of concern for the latter is the high property prices. Though property prices have started to cool down in some regions, however the fall has not been very meaningful as of now. As inventory continues to build up for the sellers (following the fall in sales volumes), it is expected that property prices would cool down further. However no one can pinpoint with certainty as to when this would happen. Or more importantly to what extent would this happen.
Residential sales take a hit in June quarter
Source: The Mint


02:00
 
Housing sector veteran Keki Mistry - Vice-Chairman and CEO of HDFC Limited - is of the view that the residential real estate in Mumbai is not going through a bubble phase. In an interview with Business Standard, the mid-income housing segment in Mumbai is seeing good demand on account of these being genuine housing demands. As for the higher value properties, these could possibly see a slowdown on account of these being purchased for investment purposes. He also believes that because real estate supply is restricted in Mumbai (due to slower approvals), the possibility of bubble situation is less. While there may have been an increase in supply in certain parts of the city in recent times, a sharp reduction of 30-40% in prices is not going to happen.

When it comes to home buyers, the price points that Mr. Mistry is talking about are of around Rs 10,000 which are the prevailing rates in the remote suburban areas of the city. Further, investors in real estate can see returns on two modes - rent and price appreciation. With rental yields declining due to high bases, investing for such returns would seem unattractive. Plus the increasing real estate supply in certain pockets would lead to competitive rentals as well. Not to mention the price appreciation that the sector has seen overtime is unlikely to happen in the future, given the high base. As such, the high value properties which are seen in the older parts of the city are essentially witnessing a bubble phase we believe.

02:55
 
Learning a bitter lesson, India's Government now seems to be on a reforms overdrive. It should be noted that policy bottlenecks and delays in implementing crucial reforms led India to witness its lowest growth rate in a decade. If this is not all, inflation has also remained consistently high. Little wonder, the Government has now woken up from its deep slumber. And seems to be undertaking one sectoral reforms after another with levels of enthusiasm previously unheard of. Therefore, as per a leading daily, after retail, aviation and fuel prices, it is now the turn of the financial sector to witness some action on the reforms front.

Mr Rajan's appointment as the RBI Governor seems part of a large plan to do just that. Infact, Mr Rajan's own recent report on the sector is likely to be a key source of the new reforms blue print. And what exactly are the kinds of reforms on the anvil? Well, they include things like more small private banks, disinvestment of small inefficient state-run banks, the freeing of branch licensing rules and greater involvement of foreigners in Indian financial markets.

While we are all for reforms, the ones involving the financial sector are always tricky. For here, risk control is as important as having an entrepreneurial streak. And the two don't often go hand in hand. Thus, regulators will have to ensure that they always maintain a fine line between the two.

03:30
 
The early nineties was a period when the Indian economy faced a severe Balance of Payment crisis. Exports began to experience serious difficulties. The crippling external debts were putting pressure on the economy. It was in the light of such adverse situations that the policy makers decided to adopt a more liberal approach. The country opened its door to FDI inflows in order to restore the confidence of foreign investors. From the nineties till 2009, India story was intact. Foreign capital was coming into the country.

But over the last couple of years, things have changed. Policy paralysis and lack of transparency and consistency in FDI policy have made investors flee the country. Every nation is in the race of attracting more FDI inflows to accelerate the pace of economic progress. India's case is no different. In order to achieve and sustain a healthy rate of growth, India would require huge investments which cannot be financed locally. Therefore, the government needs to look at alternate avenues of building up investments. FDI in this context is a very useful mechanism. Thus, India needs FDI to achieve strong rate of growth.

04:00
 
The most critical factors that determines the price of any good is the demand and supply. All other things being constant, if the demand is greater than supply, then prices tend to increase. And vice versa... Dan Alpert, an investment banker has extended this concept to the global economy in his forthcoming book titled The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy.

He makes an interesting argument. As per him, globally there is an excess supply of labour, productive capacity and capital relative to demand. What happens when demand does not match up with supply? Prices tend to decline. He points out that deflation is a very major risk for the global economy.

We do agree that there is a significant oversupply situation in the global economy. The reason we haven't seen major deflationary trends is thanks to the unprecedented money printing by major developed world central banks. Be it inflation or deflation, if left to market forces, the problems tend to get resolved through market forces. But policymakers of today are intervening more and more. And in the process, severely crippling the self-corrective market forces.

04:35
 
In the meanwhile after opening the day on a positive note the Indian equity markets have now crossed over to the negative territory. At the time of writing, the Sensex was down by about 15 points (0.1%). The other major Asian markets closed the day on a mixed note. However, Europe has opened the day in the green.

04:55  Today's investing mantra
"All the math you need in the stock market you get in the fourth grade."- Peter Lynch
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28 Responses to "Will Modi be a blessing for Indian stockmarkets?"

vikas

Apr 27, 2014

if modi will be p.m whose stock will perform best.

Like 

Bigyan Verma

Apr 7, 2014

Lets pause for a while and hand over the baton to someone who seems to be full of energy, ideas, passion and conviction to deliver... Modi must be tried out.

Like 

Girish

Oct 19, 2013

Yes He has capacity to deliver and bold leader . He would also ensure inclusive growth
In Gujarat because of growth you already see that poorer section of population lot has also
Better of today . Even minority appreciate wish him success

Like 

sn malhotra

Sep 18, 2013

as you have said, we need both growth and inclusion. This has been the perenial problem in our country for decades now. Yes, growing the cake to a bigger size is a must but then what use is it if the 'growth' is all consumed by the corner rooms and their cronies through ever increasing take homes and goodies. Years ago we talked about CEO salaries in thousands. Today it is not thousands or lakhs it is CRORES.God help our country from this unbridled avarice of a few who are doing untold damage to the millions.

Like 

vivek

Sep 18, 2013

If BJP get the required nos. then Modi will certainly deliver as he gets a free hand. If he has to depend on other parties then there will be constraints. He will still deliver in a given restrictions on minimum common programme. We have given chance to non performers for half a century can we not give Modi one chance? He deserves it. Electorate will decide in few months. Those who visit Gujarat frequently know what he has done for the State.

Like 

VIVEK

Sep 18, 2013

Modi has delivered in Gujarat. Now can he do it PAN India is a million dolor question. He has capability and he has exhibited it beyond doubts. The numbers speak. Modi opponents can go through the numbers for themselves. He is able administrator. There are no riots posts Godhara. Why only Godhara remembered after a decade.Does any one remembers the name of the Police Commissioner, the Chief Minister of Delhi after Sikhs killing in 1984, and many other riots in many other states. Modi is clear winner.

Like 

HEMRAJ BANTHIA

Sep 17, 2013

AS SOON AS SRI NARENDRA MODI IS MADE PM OF THE COUNTRY BSE OF THE STOCK MARKET WILL AUTOMATICALLY JUMP UP TO 24,000. PLEASE KEEP THIS RECORD IN MIND.

Like 

Tikam Patni

Sep 17, 2013

The oft repeated attempt of trying for policies with inclusiveness and consensus is another name for policy paralysis.

Like 

ASIM

Sep 17, 2013

Indian economy does not depend on one individual's effort. Gujarat is not India. Mr Modi is a platform speaker who entices and entertains the public with lies and half truths. He makes cheap comments. Mr Modi will make India a bankrupt country. His main aim is to implement the RSS agenda to suppress the Muslims like he has done in gujarat. Certainly he is not fit to be PM.

Like 

Robert

Sep 17, 2013

Mr. Narendra Modi is a clear fox to manipulate the figures and he can fool only the Gujaratis and the India Inc. for they get the land at the cost of poor citizen. On the contrary, he even after becoming PM cannot satisfy all the people. There is a saying "You can fool all the people some of the time, some people all the time but you can't fool all the people all the time". BJP alone cannot get even the simple majority at the Centre but will have to depend on other parties and we know the history of India, pre-independence and post independence - Back stabbing or crab mentality - I won't improve nor allow others to improve. I happen to see a TV serial "Mahadev". It can be compared to our Central and State Governments. Mahadev is always busy settling internal problems and hence he has no time to look at the problems of others.

Like 
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