Investing into India’s fourth sine wave

Mar 17 2014, 01:25 IST
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History shows seven out of the past eight General Elections  have been followed by strong, positive stockmarket returns History shows seven out of the past eight General Elections have been followed by strong, positive stockmarket returns
SummarySeven out of the past eight General Elections have been followed by strong stockmarket returns.

certain. In other words, the second commonality across these sine waves is that each sine wave has been preceded by economic reforms that have been administered over the “down” phase of the last sine wave (see chart).These often go unnoticed when administered, as GDP growth continues to nose-dive and the political leadership is focussed on the General Elections.

Given that 2014 appears likely to satisfy each of these two conditions, it seems likely that the fourth sine wave of economic growth in India will begin in FY15. In specific, most opinion polls suggest that a BJP-led NDA coalition government and/or a determined PM appears likely to assume power in June 2014. Furthermore, economic reforms administered over the past two years (in the form of FDI liberalisation), an overhaul of the leadership at the RBI, compression of India’s current account deficit, partial diesel price deregulation and the creation of the fairly effective Cabinet Committee of Investments (CCI) seem likely to act as a tailwind that would aid a pick-up in economic activity once the right political leadership assumes power.

History shows that seven out of the past eight General Elections in India have been followed by strong, positive stockmarket returns (with an average Sensex return of 27% p.a. in the two-year period following the elections). Furthermore, given that this combination of economic reform and a change in the political order has typically acted as a leading indicator of the bottom of an economic growth cycle in each of the three sine waves of growth that India has experienced in the last 30 years, there is a strong case for investing into India’s fourth wave.

Investment implications

Not only India is on the cusp of its fourth economic growth wave, a wave which is being triggered by a politics and policy reset, the political reset is resulting in the central issues in the 2014 General Elections being economic management and transparency. Whilst the political battle might be between the National Democratic Alliance (NDA) vs the United Progressive Alliance (UPA), the real debate is really between Narendra Modi’s BJP and Arvind Kejriwal’s AAP. Their debate promises to define the next decade of Indian politics and hasten the demise of politically connected companies.

On the economic front, if Narendra Modi becomes PM it is likely to result in a renewed focus on a revival of the beleaguered infrastructure and banking sectors, on labour reform and agricultural reform, and on

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