A shock in India would be good for investors

Politics is assumed to a have greater sway on economic activity in less mature markets and if similar logic applies the larger the economy the more significant the outcome.

As 900m voters go to the polls (10 per cent of which are first-time voters) in the world’s largest democracy, how important is the outcome on the 23 May for investors, and what, if anything, will really change?

You would be hard pressed to deny that under Modi’s leadership progress has been made

When thinking about elections and the markets its worth remembering the old truism that China grows because of the government whilst India grows despite of the government.

And while India market watchers will agree that the “ideal” and most likely outcome will be a renewed mandate for prime minister Modi, our view is contrarian.

Regardless of the election outcome, we believe that India should be viewed by investors as “a buy”, but a market dislocation arising from a surprise result would be a rare and exciting buying opportunity that should be grabbed with both hands. Let’s hope we get a shock.

You would be hard pressed to deny that under Modi’s leadership progress has been made, and we can point to any number of examples.

Road construction has increased by 60 per cent, tax collection is rising, corruption is falling, financial inclusion is progressing, regulation and oversight are improving.

Any politician will claim the credit for this and bet his chances of re-election on the same. But the fact of the matter is rather different.

It is the technological revolution, of which India is in the vanguard, that is driving the irreversible change towards more growth-orientated policy decisions, and politicians of all creeds in India have no choice but to ride this wave in order to stay relevant.

Internet usage is helping productivity growth in multiple ways, but principally through the creation of virtual and financial networks, now combining with a growing physical infrastructure (roads, railways, airports) which will deliver the combination of high growth and low inflation for long enough to stop caring.

India has the cheapest, but also the fastest growing per capita consumption of data globally, and with a population matching China’s for size, but where 50 per cent of the population are under 25 and GDP per capita is one fifth, where is there more upside and to what extent can bad politics really interfere?

If we were to examine various outcomes, currently the market is pricing in the consensus view of Modi’s Bharatiya Janata Party winning 220-230 seats with The National Democratic Alliance coalition partners pushing them across the 272 mark.

Should a stronger mandate be won, there is potential for a rally in lower quality cyclicals in expectation of greater business confidence igniting a capex cycle.

With some 5,500 Indian equities to choose from, investors should instead focus more on which area of the market they want to put their money, and for us the real winners are the mid and small-cap stocks.

In the last 15 years India’s mid-cap companies have delivered 12.8 per cent compound annual growth rate in US Dollars and these returns in periods of both high and low oil prices, good and bad governments, “risk off” and “risk on”.

We fully expect these trends to continue with the only long-term downside risks arising from having no direct exposure, or worst still picking the “wrong” manager to handle one’s exposure.

While share prices may oscillate in the short term, unlike other emerging markets, within the Indian equity landscape, the earnings power of portfolios is not driven by politics.

Furthermore, growth between 2018 and 2040 is going to average 8 per cent plus, which will make it comfortably the fastest growing economy in the world.

With a billion people there is a lot of potential to unlock, regardless of who is in power. The key is to stick to a simple investment philosophy: companies with strong balance sheets, high cash flow generation and quality management.

David Cornell is fund manager of the India Capital Growth Fund