»The Honest Truth by Ajit Dayal

Great Expectations
23 JUNE 2014

The stock market is on a high.

Since September 13, 2013 - the date Narendra Modi was nominated as the BJP's candidate for the Prime Minister - the BSE-30 Index has surged by +27.23% and the Indian Rupee has gained +5.21% against the US Dollar (see Table 1).

Historian may argue about the key dates of the market turnaround. Some may argue it was the date Mr. Modi was elected as the PM candidate of the BJP while some may argue it was the date when the state election results were declared.

My personal nominations would be:

  1. The day when the Rahul Gandhi interview was aired: it showed the immaturity and, pardon my expression, "dumbness" of the alternate option being offered to the people of India, and
  2. The day when the Aam Aadmi Party decided to run the government of New Delhi from the streets which made every voter wonder that, by backing the crusaders against corruption, were they inviting anarchists to rule India?
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For all Mr. Modi's achievements the total lack of a credible alternative was his best trump card. The Opposition was busy committing "self-goals".

Table 1: Local Events that shaped the market rally
DateEventBSE 30 IndexChange since
September 13, 2103
INR per USD,
fx rate
Change since
September 13, 2013
13-Sep-13Narendra Modi elected as
PM candidate by BJP
19,733 63.50 
8-Dec-13State elections, BJP wins 3,
Congress 1, Delhi hung
20-Jan-14AAP's Delhi CM Kejriwal runs
government from the streets
27-Jan-14Rahul Gandhi interview
with Arnab Goswami
8-May-14Narendra Modi interview
with Arnab Goswami
15-May-14Day before election results23,90621.15%59.296.63%
16-May-14BJP wins a historic victory24,12222.24%58.787.43%
20-May-14Narendra Modi sworn in as Prime Minister24,37723.53%58.647.65%
20-Jun-14Railway fares hiked25,10627.23%60.195.21%
Source: BSE data, news reports, Google

What next?

The markets are now at peak levels and the Indian Rupee is trading in a range that is actually making the RBI want to weaken it (by selling INR and buying USD).

A poll by Business Standard suggests that 50% of those who expressed their opinion believe that India's GDP will grow by over 8% per annum in the 5 years under Modi's leadership (Table 2).

Table 2: What will the GDP growth rate be during 5 years of Modi's rule?
Range of rate of growth in GDPPercentage of votes
Less than 6%8.88%
6% to 8%41.09%
8% to 10%38.74%
Above 10%11.30%
Source: Business Standard, May 26, 2014, total votes 1,363

That is clearly a tall order - not outrageous, but challenging.
Since 1980, over the previous 9 governments, India's GDP has grown by an average of 6.2% per annum over the 33 year period (Chart 1). The only time that India did grow above 8% was during UPA-1 when the BRIC story was hot and money was flowing into Indian IPOs and capital markets from domestic and international sources.

Chart 1: GDP real growth rate across 9 governments has been 6.2% p.a. over the past 33 years - 6.5% is a good long term assumption.

Note: 9 governments of which 6 were coalition government
Source: Quantum Advisors, World Bank

An honest analysis of India's economic history will show that the spurt in growth during 2004/2009 was largely due to a spurt in crony capitalism. That period marks the era when coal, iron ore, oil and gas, real estate and spectrum were given away to India's illustriously notorious businessmen.

To get at that 8% growth, Modi will either need to tread on that same path of crony capitalism - or put true reforms into place.

And the global environment will have to support the policies that will shortly be put in place by the Modi government.

Many things have to go right and many external factors need to be in India's favour: From El Nino and food production, to Iraq and oil prices, to Pakistan and the ISI's obsession of self-destructing its own country, to China's penchant for putting spokes in India's development plans by supporting Pakistan and ensuring it remains a constant irritant, to the continued ignorance and arrogance of the US as it bungles global stability, the continued insanity of US and European monetary and economic policy which could be painful to many emerging countries....the list is endless.

The Expected Reality may be that India reverts to a 6.2% rate of growth in GDP with maybe a little more spice....some reforms do happen and the global environment supports a 7% rate of growth.
But that 7% - while a great number in itself - will disappoint 50% of the people!

So, as we stand - perched on a 25,000 level of the Index, ready to assault the 27,000 level on budget day - we need to understand the wide chasm between the Great Expectations and the Expected Reality.

Yes, a leap of faith can bridge the gap for now ("don't worry, baba, it will happen") but - eventually - if expectations are not met, the stock markets could slip to anywhere between 18,000 and 20,000 and the INR could slip back to 62/63 per US Dollar.

Should investors sell and move out of the stock markets? In general, my advice to those already invested a fair bit would be: "Yes, book some profits".

However, if you have just started investing in stocks (and most Indians have a zero or low exposure to stocks) , then keep (or start) adding to your stock market exposure at every level of the market on a continuous and constant basis through SIPs in equity mutual funds. But don't expect any near term returns and have the stomach to see some erosion in your initial capital invested. Irrespective of near-term events, stock markets have been a great way to generate long term, sensible returns.

Be an "India bull" but recognize some of the expectations priced in to today's levels may be "all bull"! ☺

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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at 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. To write to Ajit, please click here.