After First 100 Days, Baring Asset Management Still Smiling On India's New Regime

Tom Burroughes

11 September 2014

When a country’s stock market has risen by almost a third since January and autumn has barely begun, the signs are (mostly) auspicious. That appears to be the case with India, now over a 100 days into the regime of its new government.

Since the landslide election for India’s BJP Party around three months ago, putting Narendra Modi into power as prime minister, economists and investors have generally lauded what they see as the pro-reform credibility of this new administration. India, a country hobbled for too long by problems of corruption and bureaucracy, is seen as a big beneficiary of meaningful reform. That is certainly the view of the managers at the Baring Asset Management India Fund.

“We see potential for very robust increases in corporate earnings as well as a further re-rating of the Indian market, Barings said in a note. “We believe the short-term prospects for India are indeed compelling, but so too is the longer term story. In our view, India is currently entering a new phase of growth that will persist over the next three to five years,” it said.

Barings said it is holding firms likely to benefit from faster growth, such as consumer staples, financials and industrials.

“As the government of Indian Prime Minister Narendra Modi completes its first 100 days in office, scrutiny has mounted as to the progress of the new leader for whom expectations have run so high. Prime Minister Modi’s electoral slogan `Give me 60 months’ may suggest a fairer timeframe in which to measure his success. That being said, in our view, he has pursued meaningful reforms, with a determined style of leadership upon which his longer term success will ultimately hinge,” it continued.

The fund management house cited the seemingly modest example of how some government processes have been put online, which is not just more efficient but makes administration more open and easy to scrutinise.

“In our opinion, the government’s prompt riposte to India’s Supreme Court, following its ruling that the system of allocating coal block concessions for the past 20 years may have been illegal also exemplifies this new government attitude of responsiveness and decisiveness,” the firm said. “The ruling has created significant uncertainty for private companies invested in the sector. While the government has argued that certain concessions should not be withdrawn where production is already underway, it has also sought a speedy resolution to the matter,” it said.

“On the economic front, we believe the new government’s stance on subsidies for diesel fuel and the ‘minimum support prices’ provided to farms is also significant. Changes to the diesel subsidy will help to reduce strain on fiscal resources and to lessen inflationary pressures. With diesel prices on the rise, the government has been able to withdraw subsidies. As for farm products, after years of generous support to farmers, the government has agreed to an increase in its programme of minimum support prices, albeit at a level below the rate of expected inflation,” it said.

Recent gross domestic product data shows an annual rise of 5.7 per cent, although there were already signs of an upswing before the election results came in, the firm continued.

“Looking ahead over the short-term, we expect economic growth to remain strong, which should continue to support the Indian equity market even after a 29.2 per cent rise in the MSCI India Index in US dollar terms in the year to date. Key economic indicators such as the volume of passenger car sales point to greater buoyancy in activity, as do commercial vehicles sales, where we are seeing the rate of contraction beginning to slow. At the same time, cement production grew more than 16 per cent year on year in July, providing a good indication that things are picking up,” it said.