May 20, 2019 / 5:38 AM / a month ago

Breakingviews - Modi win will underpin India's market exuberance

India’s Prime Minister Narendra Modi arrives to file his nomination papers for the general elections in Varanasi, India April 26, 2019. REUTERS/Adnan Abidi

MUMBAI (Reuters Breakingviews) - Indian voters just gave the country’s stock market some support. Prime Minister Narendra Modi’s ruling Hindu-nationalist Bharatiya Janata Party is coasting to a comfortable second term, based on exit polls released on Sunday. If the electorate has indeed looked past employment problems and rural economic distress, the prospect of political continuity will keep valuations stretched for the time being.  

An average of six polls suggests the BJP could lose its rare outright majority, but that its coalition will secure 314 out of 545 parliamentary seats and so won’t need any new allies. It raises hopes that foreign direct investment will remain buoyant and that Modi can push through more changes, including privatisation. The result also is bound to squash fears of reckless spending by an alternative government potentially led by Rahul Gandhi, whose main opposition Congress party promised a generous minimum income plan for the poor. 

Even so, markets may be volatile until Thursday’s tally. Exit polls are getting better, but failed to foresee a shock defeat for the BJP alliance in 2004. Five years later, they underestimated the scale of a win by the Congress coalition. That mistake was mostly repeated in 2014 when Modi swept to power on an anti-corruption wave. Indeed, Indian shares tend to move dramatically following results, often triggering circuit breakers. 

An equity market rally on the back of a Modi win could leave it vulnerable to a sharp downturn, however. At a valuation of nearly 18 times expected earnings, the MSCI India index is already trading at a higher multiple than its five-year average, and at a more than one-third premium to its MSCI Asia counterpart excluding Japan. And it is occurring against a shaky global backdrop with U.S. President Donald Trump escalating a trade war with China. 

The optimism may not be completely misplaced if Modi can successfully repair a trust deficit with the country’s tycoons to revive private investment. That could take some time, though. And more Indian companies have fallen short of earnings estimates than beat them in the latest set of results, Goldman Sachs analysts note. Consumers are also buying less of everything from cars to toothpaste. At some point, investors will put fundamentals over politics. 

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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