Modi Sweeps the Polls - Now to Unclog the Economy - The Honest Truth By Ajit Dayal

Modi Sweeps the Polls - Now to Unclog the Economy

27 MAY 2019

While the Mumbai Indian cricket team, backed by the Ambani family, scraped through to a thrilling last-ball win in the IPL 12 finals on May 12th, when counting after the 7-phased polling began on May 23rd, Prime Minister Modi, backed by a mass of believers, swept through the polls in India in grand style with an unprecedented start-to-finish vote count.

In a horse race, a horse may leave the gate and take the lead immediately, pull away from the field and establish its supremacy. In these elections for 542 seats of the Lok Sabha (the Election Commission annulled elections for 1 seat due to violence), the Modi wave was apparent as the counting on the Electronic Voting Machines showed an immediate surge for the BJP and, as counting progressed, the leads kept galloping. It was like 302 horses pulling away from the gate in 302 separate races spread over 302 very diverse constituencies across India and 295 of them behaving in an identical manner, running with the same fiery pace: the coordination and synchronization of the dancing water fountains at the Burj Khalifa in Dubai seem far less impressive now!

Graph 1: Modi pulls away at the starting gate and never looks back - in 302 races!
(The Hindu real time graph here on leads/wins)


India's voters have given Prime Minister Modi a two-thumb up victory that has seen the vote share of the BJP - and seats won in the Lok Sabha - to record levels. While analysts will continue to pour over the reasons for such a resounding victory, the focus now will be on the impact of the likely policies on the Indian economy.

Table 1: Modi Fever grips India

Source: Election Commission of India.

Within a short span of a few days, the stock, bond, currency, and gold markets have already shown their optimism. From the date of the first opinion polls on May 19 (using a market closing rate of May 17th) till the full results were known on May 24th, the BSE-30 Index gained +4%, the interest rate on the Indian 10-year bond declined and resulted in a +1.9% gain in the price of the bond, the INR gained 1% against the US Dollar, and gold lost -1%. That is a good start for markets.

Table 2: Markets celebrate Modi's victory

  May 17 May 24 change
BSE-30 Index 37,931 39,435 +4.0%
India 10 year bond yield 7.364 7.225 +1.9% (price)
INR / USD 70.22 69.53 +1.0%
MCX Gold INR / 10 gm 31,911 31,591 -1.0%
Reliance Industries 1,267.40 1,336.85 +5.5%
Adani Enterprise 119.20 156.40 +31.2%
L&T 1,361.90 1,544.15 +13.4%
Crude Oil (in USD) 62.76 58.95 -6.1%
Source: Bloomberg.

What Next?

With the two passions of cricket and politics out of the way (though the cricket World Cup will start on May 30 in England), the emotional highs will be replaced by some hard-nosed numbers on the state of the economy, the policies needed to revive growth, and their likely impact on the markets.

The stock markets are influenced by the earnings growth of companies. So far, those numbers are dismal. Yet, share prices have risen thereby resulting in an expanding Price/Earnings Ratio. This is not sustainable. India is now one of the most expensive markets in the world with a PER of nearly 30x.

Chart 1: A poor 15% cumulative growth in EPS of BSE-30 Index since 2014; investors swooned by Modi Mania, not by actual reported EPS. The future looks good - yet again! - as a 68% growth in EPS projected over the next 3 years.


To justify these expensive valuations, the expected growth in earnings must be over 30% per annum for many years. And to get that level of growth in EPS, the economy needs to be growing faster than what it is. While many can argue that there has been job creation and criticize those who say it has been anemic as "anti-national" or argue whether the rate of growth in the economy is higher or lower than the rate of growth under UPA, no one can claim that there has been any impressive rate of growth in EPS.

To move the economy to a growth path of 10% per annum under the new series (so about 8.5% under the old series of GDP data), one of 3 things needs to happen in isolation or in some sort of combination:

  1. the government will have to invest more in the economy,
  2. private sector investments, whether by local companies or via multinationals surge,
  3. consumers spend more, either based on higher salaries and incomes or based on borrowing more money.

The government is constrained by many factors. Given the high spending and low revenue collections, the money needed in the banking system for historical bad loans, the money needed to replace all the bad loans made by mutual funds to NBFCs, and the money needed for farm loans and MNREGA, it will not be an easy task.

The Modi government has been given a rare opportunity in history to take a second shot at making the elephant fly.

May 30th, the date the Prime Minister take oath and announces his cabinet, could be showtime!


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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site.

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3 Responses to "Modi Sweeps the Polls - Now to Unclog the Economy"

JAGJEEVANDAS SHETTY

May 31, 2019

"backed by a mass of believers" - regrettable that Mr. Ajit Dayal is displaying superiority complex by questioning the voters' choice and assuming they did not vote by choice and cast them as blind believers.
Mr. Dayal seem to have forgotten all the negative writing he contributed regarding Mr. Modi and his government.

Like (1)

velmurgan maruthachalam

May 28, 2019

As usual a very impressive and thoughtful article from Ajith. One thing I see clearly is that realistically there is no possibility for the 68% growth in EPS for BSE within the next 3 years. I am curious to understand if Ajith holds such a realistic view on Economy how does Rahul and team sells the 10,000 sensex within the next 5 years in Rebirth of India ( Of course our PM talks about this rebirth of India for every other messup action he taken on with Indian economy) ...Is my understanding correct that Ajit and Equitymaster (led by Rahul and Team) holds totally different views about Inidian economy for the next 5 years. Please confirm.

Thanks
velmurugan

Like (3)

Aniruddha Malpani

May 27, 2019

Sadly, the voice of sanity will go unheard !

Like (5)
  
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