Indian election results excite investors

Collective funds with exposure to India saw their portfolios rise even higher on Friday as the preliminary results of the country's general election sent its stockmarket soaring to record highs.

In Mumbai, the S&P BSE Sensex index closed 0.9% up, having registered intra-day gains of up to 6.15%, as investors reacted to election results that will almost certainly see the opposition Bharatiya Janata Party's Narendra Modi become Prime Minister.

Modi is seen as far more business friendly than the leaders of the current government, which is run by a Congress Party-led coalition, and has fought the election on a platform of economic reform since being adopted as the BJP candidate last September.

Before Friday, the Indian stockmarket had already risen 14% this year in anticipation of a strong performance by Modi at the polls.

Investors have given more credence to the BJP's pledges - to break a logjam holding back key infrastructure projects, tackle corruption and cut bureaucracy - given the party's record in Gujurat, where Modi has been head of state since 2001.

Economic growth in Gujarat has averaged 10% a year during his term of office, thanks in large part to massive public works projects.

Nationwide, the BJP now promises to build 100 new cities, build high-speed railways and construct a national fibre-optic network.

Energy stocks

Those commitments saw power and energy company stocks perform especially strongly on Friday, while the financial services sector was lifted by the speculation that India's credit ratings would improve under a Modi government.

Achieving such ambitious plans will require Modi to forge political alliances with India's State governments and the upper house of the Indian parliament, where the Congress-led alliance retains control.

However, analysts said on Friday that the election results - early returns suggest Modi is heading for a much bigger majority than previously expected - would strengthen his hand.

"The new government will without a doubt be in a stronger position to push through reforms than anyone had thought likely even a week ago," said Mark Williams of Capital Economics. "The onus will now be on Modi to demonstrate that investors are right to put their faith in him."

There is certainly work to be done. India's economic growth has stalled in recent years. At around 4.5 to 5%, annual growth over the past two years has been lower than at any time for a decade, and both inflation and unemployment are rising.

While economies across Asia have slowed at the same time, India has suffered more than its rivals, with the government facing criticism for failing to pass legislation paving the way for public investment.

Meanwhile, India continues to suffer from chronic long-term problems including the country's failure to industrialise, with India now trailing other Asian countries on manufacturing; its protectionist regulation, which has stymied foreign investment; and its lack of basic infrastructure.

Collective funds look for long-term gains

Both open-ended funds and investment trusts with exposure to India - including specialists and emerging market generalists - have benefited from the strong performance of the country's equities in recent months.

For example, Baring India is up by almost 19% since the beginning of the year, while Neptune India has risen by more than 17%. JPMorgan Indian Investment Trust has posted a return of more than 15%.

However, fund managers invested in India said it was important to temper the stockmarket's optimism with practical caution. At BlackRock BSF Emerging Markets Absolute Return, Sam Vecht, the manager of the fund, said the country's economic prospects over the medium to longer term were exciting, but that realising India’s potential would take time.

"We are long-term bulls on India, given its entrepreneurial culture, industrious workforce and high savings rate; the currently low level of financial penetration and GDP per capita leaves plenty of room for future growth, and we further increased our exposure in the summer of 2013 when many in the market were concerned about India's current account problems and a falling Rupee," Vecht said.

"We think that truly changing India's business culture is a monumental task, and one that is unlikely to be achieved in the market's all-too-often myopic timeframe. As such, while we retain a positive view for now, the appearance of excessive euphoria about India's short-term prospects would lead us to trim positions."

JPMorgan Asset Management global market strategist Alex Dryden also sounded a note of caution. "Investors should be wary when assessing Modi's ability to revitalise India's immediate prospects," he said. "The country is infamous for the thickness of its red tape and even well-intentioned leaders can find themselves tied up by the country's bureaucratic machine."

However, at Advance Emerging Capital, chief investment officer Dr Slim Feriani was notably less wary. "We believe that the Modi victory can act as a catalyst to unlocking the growth that India's $2 trillion [£1.19 million] economy promises," he said.

"This is bolstered by India's 'demographic dividend' where by 2015, according to the United Nations, the median age of India's population will stand at 26.9 years, compared to Western Europe's 43.7 years. In addition, we would expect to see growth supported by greater confidence from both individuals and companies as to the country's longer-term prospects."