Market rally: Foreign brokerages raise their pitch on Modi's election win

Just a month after investment bank Goldman Sachs upgraded Indian equity markets on hopes of a Narendra Modi-led BJP forming the next government,leading foreign brokerages CLSA and Credit Suisse too see prospects of significant gains in the market the run-up to the general elections early next year.

The assumption is that the new government will act in a decisive manner and introduce bold new reforms.

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For instance on November 10 Christopher Woods, chief equity analyst at CLSA Asia-Pacific markets said, “The forthcoming Indian elections is going to be the most important political event for investors in Asia next year. The perception of investors is that the investment cycle in India is partly driven by government policies and changes.”

The brokerage hasadded one more percentage point to the small India overweight in the Asia Pacific ex-Japan relative-return portfolio primarily because of the potential catalyst provided by the forthcoming state elections.

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“It certainly makes sense for foreign investors to be watching India much more closely, as reflected in the increased number of attendees at this year’s forum, since the proximity of the general election creates the potential for a bullish, as well as bearish, catalyst. The key point to note is that if an cycle does resume in India in the next one to two years then India probably becomes the best equity investment story in Asia again, just as it was between 2002 and 2009,” said Woods in CLSA’s latest “Greed and fear” report.

It has also noted thatthe BJP leader’s best chance is to “tap pro-growth aspirations of young first time voters” in 2014 butwarned that “the big unknown is the attitude of rural voters who benefit from Congress policies,” like food security and other social schemes.

“Modi’s best chance of winning convincingly is if he can tap, helped by the intelligent use of social media, “big data” and the like, the pro-growth aspirations of an estimated 149 million young voters who will be voting for the first time in next year’s general election, representing about 20% of the electorate.. The Modi campaign is trying to use technology to make sure registrations happen on the view that younger voters will vote at least two to one for Modi’s investment-driven growth agenda. Meanwhile, there is a certain irony that the 63-year-old Modi is going after the youth vote against the much younger heir apparent of the Congress party,” said Wood.

He has been predicting a victory for Modi citing the big crowds that his rallies are drawing.

He reckons that India’s electorate is “pining for a change and, in particular, the return of a government focused on a growth mandate rather than a mandate based on the promise of more handouts on the ‘alleviation of poverty’ theme.”

CLSA predicts that the BJP will win three of the four key states that are voting between now and early December.

Earlier this month, global investment bank Goldman Sachs drew sharp criticism from the government for suggesting that Modi could win the next general elections.

“Equity investors tend to view the BJP as business-friendly, and the BJP’s prime ministerial candidate Narendra Modi as an agent of change,” Goldman analysts, including Hong Kong-based Timothy Moe, wrote in a Nov 5 report. Commerce and Industry Minister Anand Sharma had said such reports could be “coloured, influenced and these are most inappropriate.”

Meanwhile, brokerage Credit Suisse has said India, MSCI China and South Korea are its biggest ‘overweights’. The brokerage advises buying the rupee, betting Reserve Bank of India Governor Raghuram Rajan will curb inflation.

However,after two months of pumping money into the Indian markets, FIIs now seem to be showing signs of nervousness.

For instance, On November 22, FIIs were net sellers of equity for the first time since October 3 and sold Rs 40 crore of shares on renewed uncertainty about the US Federal Reserve tapering its stimulus programme.

“Market is very highly dependent on foreign investors’behaviour,” said Raamdeo Agrawal, Joint MD, MotilalOswal Financial Services.

Given the lack of retail participation, it is obvious the current rally in stocks is largely driven by liquidity rather than positive changes in fundamentals. So any significant corrections in stock prices driven by FII sell-offs is probably a good time to buy value stocks.