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India Deserves a Dedicated Investment Mandate
International long-term investors such as pension funds are grossly under-allocated to India compared to the global opportunity asset pool.
Ajit Dayal, founder and member of the portfolio team, founder Quantum in 1990...
Featured Insight
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Avoid the pitfalls of corporate greenwashing in India, or as we term it, "EHG" - 'Eyewash, Hogwash and Greenwash'.
QUANTUM ADVISORS PATHWAYS
Indian Elections Don't Matter to Long Term Investors
Pathways deliver a deep dive into navigating the ideas and insights on new and rapidly growing India asset classes. In this Pathway we examine how India's loud, messy, chaotic democracy can overemphasise political risks for long-term investors.
By Arvind Chari, CIO
On 17th May, 2004, the Indian stock markets hit its lower circuit, (-20%). The Bombay Stock Exchange (BSE)-30 Index, Sensex, fell by 842 points, its steepest one-day fall ever then.
The National Democratic Alliance (NDA) led by Bharatiya Janata Party (BJP) lost the general election to the United Progressive Alliance (UPA) led by India’s GOP, the Indian National Congress (INC). That the UPA alliance was supported by the Left/communist parties seemed to have spooked the markets in believing that the reform momentum will end and India’s growth trajectory which was recovering would be stalled.
I joined Quantum in August 2004 and my boss and Quantum’s founder, Ajit Dayal guided me to write my first research piece titled ‘Government Actioned Politics’ – The Quantum GAP report. A simple analysis to show:
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The reform process initiated in India since 1980 had led to a sustained rise and break-out of the Indian GDP growth;
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Between 1980 and 2004, the Indian government at the Centre/Federal level had changed 7 times;
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4 of those 7 governments were Coalition governments, Governments with no clear party with majority;
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Coalition governments may be slow, may bicker, but can create consensus to drive decisions;
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There were governments with a tilt to the left; there were governments with a tilt to the right; and they all continued the reform momentum;
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The average Real GDP growth across those 7 governments was 5.8%; The BSE-30 Sensex Index in USD terms from 1980 till May 2004 delivered a CAGR of 5.8%; INR CAGR 16.3%
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Indian GDP and Indian stock markets are correlated. However, governments in power have no correlation to long-term GDP growth and long-term stock market returns.
In 2004, Quantum was just beginning its new avatar of being a standalone, independent, India investment manager. Our message to potential clients based on this thesis then was ‘Buy India’.
Indian corporates are used to this loud, messy, chaotic democracy which throws up unpredictable outcomes.
The market correction was a great opportunity to build/allocate to your long-term India allocation.
Extend the same simple analysis to today:
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Between 1980 and 2023, the Indian government at the Centre/Federal level has changed 11 times;
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8 of those 11 governments are Coalition governments; However, both the Governments since 2014 have had BJP winning clear majority on its own. So although it’s a coalition, it acts like a single party government;
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There were governments with a tilt to the left; there were governments with a tilt to the right; and they all continued the reform momentum;
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The average Real GDP growth across those 11 governments has now increased to 6.2%; The BSE-30 Sensex Index in USD terms from 1980 till August 2023 has delivered a CAGR of 9.5%; INR CAGR 15.5%.
If now, pre and post the 2024 elections, if the Indian stock markets correct, only because of a change in government, you know what to do.
Chart 1: Indian governments, across parties, have followed a steady set blueprint of reforms since 1980 boosting long-term GDP growth
(Source- loksabha.nic.in; world bank; parties in red – coalition governments; in black – single party majorities; World GDP post 2020 is annual; 2023 GDP is estimate; India GDP uses old and new GDP series; Returns are for BSE-30 Index, From April 1998 is Total Returns Index in INR as sourced from Bloomberg Finance L.P)
The next general elections (federal elections) are scheduled to be held in April-May 2024.
What has got the market talking about it already is due to a renewed strategy of the opposition parties to counter the two-term incumbent Modi government of BJP.
BJP is the only party since 1984 to have won two successive elections with a simple majority of its own. Fearing a repeat, given Modi’s popularity and their general handling of the economy, the opposition parties have strung together an alliance of 28 parties, hoping to put forward a united challenge to Modi and BJP.
India – No Country for a Strong Man
Do Global Corporations and Investors consider India becoming un-democratic, autocratic? Should they worry about Modi being a ‘Strong Man’? Global Corporations and Investors have seen the financial impact of investing in undemocratic, strongman led countries. We do not think this worry has got anything to do with the form of political system. The worry stems from individuals who have unlimited power to decide and destroy. We however argue that, India is not China, Russia or Turkey. Modi is not a Xi, Putin or Erdogan
Table 1: The Great Indian Election
(Source: Election Commission of India; Quantum Advisors)
The opposition seems to have rattled the BJP by calling their alliance INDIA (Indian National Developmental and Inclusive Alliance). So much so that, the government has started referring itself as ‘BHARAT’ in official communique. Modi’s placard in the G-20 summit in Delhi in September read, ‘BHARAT’.
India’s constitution begins with, ‘India, that is Bharat’.. which is a Sanskrit word used in ancient scriptures to refer to parts of what is known today as INDIA. The use of ‘BHARAT’ for ‘INDIA’ is very common within India.
With the ‘INDIA’ alliance of 28 parties led by the Congress and the ‘NDA’ alliance of 38 parties led by the BJP, the Indian general election now seems to be turning into a two party fight like the US.
We will highlight three key factors to watch for market reaction to these political outcomes:
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The government has called a special session in mid-September; few speculate that the government may push for early elections denying any momentum to the opposition alliance or push for ‘One Nation, One Election’ - a move to synchronise state and federal elections;
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The INDIA alliance being able to agree on seat sharing and deciding to put forth one consensus candidate per seat for the general election;
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Between now and then, there are 5 state elections scheduled in November-December 2023 :– Madhya Pradesh, Rajasthan, Chattisgarh (Central and North-west India); Telangana (South India); and Mizoram (North-East India) and its outcomes as a factor for sentiment for general elections.
Chart 2: Parties voted to power in General Elections (2019) and
Chart 3: Parties voted to power in State Elections (as of August 2023)
India votes differently for General and State Elections
Source: Jefferies Research – Orange is NDA, Blue is UPA/INDIA; Grey is others
These probable outcomes have got the sell-side strategists excited. Morgan Stanley and Jefferies have come out with long reports analysing possible scenarios and likely outcomes.
Jefferies gives a 10% probability to a BJP defeat in 2024 and expects markets to correct by 10%.
Morgan Stanley thinks markets would correct 20%-25% if the INDIA alliance wins and a 40% drop in a scenario of neither lead party getting 200 seats leading to a weaker coalition government in the Centre.
Table 2: Election results does not matter to short term or long term returns!
Source: morganstanley research; BSE-Sensex data; Quantum Advisors; *-lead party without majority; returns are for BSE-30 Sensex; returns from April 1998 are total returns as sourced from Bloomberg Finance L.P
Long-term investors don’t need to bother about it.
The reason it does not seem to matter at all is that:
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Successive governments carry on the reform process and hence attract long-term capital
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Governments share of the economy isn’t that large
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Indian economy is driven more by individuals and private enterprise and is linked to the global economy to a larger extent than apparent
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Indian corporates are well placed to deal with the chaos of the political system
Since 1980, India has in general pursued a blue print which facilitates the following:
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Moving to a market driven economy;
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De-regulate, liberalise and privatise various segments of the economy;
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Creating Rule of Law with institutions which allow markets to function; businesses to survive; and competition to thrive
Chart 4: India since Independence; Berlin wall falls, Soviet-union collapses, India looks west to provide economic freedom to its citizens
Source: Quantum Advisors
Some governments may focus on the hard aspects facilitating the above; some governments may choose to prioritise the softer reforms required to improve productivity. Some governments may be populist; some may be fiscal conservatives. Some may build consensus; some may take majoritarian decisions.
Table 3: India Reform Momentum across governments over the last 20 years
Source: Quantum Advisors
There is merit in strong, stable governments, to take decisions and implement at a faster pace. But strong governments often lack parliamentary accountability which is not good for a democracy. They can also take damaging decisions like nationalisation, emergency, demonetisation, which can have adverse consequences.
What investors need is certainty. Which can come from political stability. Since 1999, all governments, be it single majority or coalition, have completed their full term of 5 years.
For a diverse country like India, with Federal, state and municipal government system, a coalition government seems imperative to build consensus and drive decisions. Some of the best reforms have happened under coalition governments. It is not a constraint to reform, if you can build consensus.
The aspect of India being a democracy in a diverse society and with the pressures of coalition politics, is also why there are limits to India’s potential growth.
We at Quantum continue to believe that India’s long term real GDP growth potential is 6.0%-6.5%. This leads to an annual nominal GDP growth of around 11%-12%. That nominal growth plus corporate productivity is what is reflected in the Indian equity markets and its indices.
Chart 5: India GDP growth translates into Equity Returns
Source: Refinitiv DataStream, All data in USD, GDP data is quarterly till June 2023, Index data is monthly till July 2023
This double digit nominal returns is the long-term equity return assumption case for the last three decades and will remain possible for the coming two decades.
That GDP across government chart you saw above, is thus always our first message to clients in a presentation. In fact, that chart is also on our visiting cards.
A simple message to think about potential growth and returns from India, long-term.
India@75 – How Geo-politics Shaped India’s Destiny
We look at how the geo-politics shaped India’s socio, economic and political trajectory over the last 75 years. Be it the independence from the British colonial rule post World War 2; the idea of non-alignment; India’s pivot to Russia as Nixon embraced China in the 70s and the fall of the Berlin wall which made India look to the west unleashing market-economy reforms in the 1990s.
Explore how our two main strategies – India Value Equity and India Responsible Returns - are built on sound investment principles and follow a disciplined investing process.