India Election Season Casts Shadow on Asia's Priciest Stocks

(Bloomberg) -- India’s $2.3 trillion stock market has become a magnet for investors since Prime Minister Narendra Modi took office more than three years ago. His performance in the state polls before the 2019 national elections will determine if the sentiment stays bullish or sours.

That’s the view of Anish Mathew, the Singapore-based chief investment officer of Sundaram Asset Management SG. Only a political shock can derail a rally that’s made India equities the most expensive in Asia when measured by price to earnings, he said.

What might that shock be? “There’s none as of now, but going forward it could be anything that causes the market to start worrying about BJP’s prospects of winning the 2019 general elections,” Mathew said.

The current poll in Gujarat has turned into a closer than expected fight for Modi as the landmark consumption tax and last November’s cash ban stoke economic discontent in his home state. Most observers expect him to win when votes are counted Dec. 18, though his lead shrunk as the election neared.

Polls will get more market attention in 2018 as eight state assemblies are due for elections.

“Single election fallout will have a limited impact,” Mathew said. “Only if it becomes a trend in the run-up to the 2019 elections will it become a dampener.”

Here are some highlights from Mathew’s interview:

What can trigger a correction in Indian stock prices?

• “A 5 to 7 percent correction keeps happening, those are natural. I don’t see a 10 to 15 percent correction happening at this point in time unless a shock comes through from the political front. That’s the only trigger I see for a correction in the Indian market.”
  • The S&P BSE Sensex dropped 0.3 percent at 10:08 a.m. in Mumbai, halting three days of gains. The gauge is set for its best year since 2014.

The market expects Modi to win a second term. What can go wrong?

• “Definitely a re-election is on the cards. The market, at the moment, is not pricing in non-return of Modi. 
• “I would be worried if it is a weak victory. Obviously the kind of strength he got in 2014 may not be possible. If he achieves that there will be a positive surprise.”

What is your assessment of Modi’s government?

• “He has done very well. What impresses me is that his moves are long-term structural moves. He hasn’t made any populist moves.
• “From an economic point of view these are all the right moves. It causes short-term pain, which impacts growth, but that makes it stronger for the long term.”

Is the recent Moody’s upgrade a vindication of his policies?

• “I think it was coming. Look at the structural changes being brought about, from the ease of doing business and the goods and services tax to the cleaning up of the banks and the power sector. The government has been focusing on the right things.”

You plan to launch a new India fund. Are stocks not expensive?

• “Yes, it is expensive but India’s premium over other EMs has remained stable.
• “The economy is bottoming out as the impact of demonetization and the GST ebbs and companies are expected to boost earnings in the next couple of quarters.
• “Companies have begun to invest in capacity additions, hinting that consumption may be on the rise. Infrastructure spend is seeing an uptick and that is seen in the higher utilization at cement factories.
• “Fiscal deficit at the central level is declining steadily, inflation and the current-account deficit are under control, and forex reserves are up to 11 months of import cover. The economy is in a very sound situation.
• “For the next two years our annualized earnings growth forecast on our portfolio is something like 23.5 percent.”
  • NOTE: The Sundaram India Midcap Fund has returned 20 percent annually in dollar terms since its launch in July 2014.

How are you positioning for the outcome of Gujarat polls?

• “There’s no change to our strategy. We are not short-term focused.”

To contact the reporter on this story: Ganesh Nagarajan in Chennai at gnagarajan1@bloomberg.net.

To contact the editors responsible for this story: Candice Zachariahs at czachariahs2@bloomberg.net, Ravil Shirodkar, Colin Simpson

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