India's election result was the best possible outcome, one fund manager says. Here's what foreign investors are missing.

By Steve Goldstein

Indian stocks nosedived 6% when election results earlier this month showed the ruling Bharatiya Janata Party needed to govern with a coalition.

But they've rebounded since then, and the benchmark Sensex index IN:1 is actually 5% above where it stood before the election was held.

Gaurav Narain, co-head of equities at Ocean Dial Asset Management and the manager of the London-listed India Capital Growth Fund, said the result was actually the best possible outcome. The BJP's alliance partners have sought more funding at the state level rather than ministerial positions, and now the BJP will not be able to take more far-reaching policies such as altering the constitution.

"Policy continuity and the old development agenda will continue, but at the same time there's a reality check that, their powers have been curtailed to some extent," said Narain. "So, in hindsight, I would say this is the best possible outcome."

Morgan Stanley just issued a particularly bullish forecast on India, saying structural reforms can drive 20% compound earnings growth over the next five years.

Narain wasn't quite that bullish but said the economy can grow between 6% and 7% per year, or as much as 12% when including inflation. "My sense is that 20% [earnings growth] looks unrealistic," he said. "But I would say, you'd have multiple companies that can compound at 15% per annum."

The Indian stock market has been overwhelmingly driven by domestic investors, as mutual-fund companies have been successful in a drive to get retail customers to switch out of gold and real estate to equities by what are called systematic investment plans.

Indian stocks historically have traded at a premium to other emerging markets because companies are more diversified and rely less on commodity extractors that are price takers. Now, however, that premium is at new levels - Indian companies trade at 29 times last year's earnings, vs. 17.5 for the Asia-Pacific region ex-Japan, according to Citigroup data.

"When investors are sitting in the U.K., and you look at valuations of Indian companies versus other companies, it's very difficult to say that I'll put money in India," he said. "I would say that there is predictability in growth, and this growth seems sustainable."

He pointed out that the Indian market over 10 to 20 years is one of the strongest in the world despite these valuations.

Over the last decade, the Sensex has returned 13% annually, about the same as the S&P 500 SPX, according to FactSet data, and well ahead of the 2% return for MSCI China.

"And one of the reasons is - if you actually look at the GDP growth of India over the last decade - India's GDP itself in dollar terms is compounded at about 10%. So, what you're actually seeing is India's possibly one of those markets where the GDP growth has translated into earnings growth, which has translated into the market growth," he said.

He said that virtually every sector - outside of IT services, which is exposed to the global environment - has a story to tell. His fund's top holding is contract manufacturer Dixon Technologies (IN:540699), which he compared to Foxconn, but sector-wise, the fund is most exposed to financial and consumer stocks.

Narain also spent a lot of time discussing India's digital infrastructure, which unlike the U.S. and other Western countries, is government-owned. The Reserve Bank of India said India accounts for nearly 46% of the world's digital transactions, and know-your-customer applications for bank accounts or mobile phones are completed in about two minutes.

"The digital infrastructure in India has had a dramatic impact," he said. "That has really done wonders for the economy, and I would rate it as I think among the best in the world."

The U.S-listed iShares MSCI India ETF INDA has gained 14% this year, just slightly underperforming the 15% rise for the S&P 500.

-Steve Goldstein

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

06-20-24 0917ET

Copyright (c) 2024 Dow Jones & Company, Inc.