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Fund manager view: three reasons why the Indian bull market may continue

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Written by: Kunal Desai
01/08/2016
Indian equities have officially re-entered a bull market, says Kunal Desai of Neptune Investment Management, and he lists three reasons why it can go from strength to strength.

The benchmark index climbed to an 11-month high. Better-than-expected data on US jobs and a brightened outlook for global growth have contributed to the MSCI India Index delivering over 19% since March in USD terms and 29% in sterling terms, but domestic drivers have also played a big part in the recent rally.

Here are three reasons why we believe the Indian bull market can continue:

1) Further earnings growth could be on the horizon

Green shoots are emerging within the economy, but there has been frustration that these economic developments are seemingly not translating into corporate earnings. We believe these frustrations are beginning to subside.

The last quarter saw low double digit earnings growth, and market expectations are for 16% earnings per share (EPS) growth for the full year 2017. The Reserve Bank of India’s (RBI’s) focus on disinflation and the commodity price collapse has taken its toll on top-line trends for companies but we believe that in 2017, average EPS growth of 18% can be achieved.

We believe that India is currently in an earnings growth sweet spot, with strong GDP growth, low capacity utilisation and low corporate capital expenditure all boding very well. It’s not necessarily rare for any one of these things to be happening, but very unusual for all three to be happening at the same time. In our view, we are starting to see the fruits of this, but there could be a long way to go.

At the same time, valuations in India are reasonable, particularly in select mid-cap areas, where we believe the most interesting stories exist.

2) Reform story is gathering momentum

India, with its strongest government in a generation, continues to move doggedly in a reformist direction. The RBI and government policymakers all talked about ‘getting it right this time’ and, slowly but surely, we believe they are.

Rather than taking shortcuts to boost temporary periods of hyper-growth, platforms are being created for more sustainable long-term growth. We believe that the government and RBI – which are working closer together than they ever have – are maintaining a focus on the self-help story by continuing to move doggedly in a pro-investment, pro-market direction.

It looks increasingly likely that the Goods and Services Tax (GST) Bill will be passed in the next monsoon session, and there are a number of other recent developments to suggest India is moving in the right direction. Prime Minister Modi currently has a 70% approval rating, which gives him a strong platform to keep the reform agenda going.

3) Political premium of India is falling relative to both emerging and developed markets

A key driver of the Indian market’s strong performance against its emerging market peers has been the fall in its political risk premium. Indian companies had once grown in spite of the government. However, since the election of a majority pro-reform party in 2014, investors and corporates alike have cheered a fresh dawn of stable politics.

In a post-Brexit world, there is a strong argument that India’s political risk premium is not only falling relative to other emerging markets, but developed markets as well. Today we have the largest valuation mismatch between developed and emerging markets that we have seen in the last decade.

With an increasingly uncertain political picture across a number of developed markets, we could start to see a rotation from developed markets into emerging markets, which have been out of favour for so long.

Kunal Desai is fund manager of the Neptune India fund

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