Foreign Money Votes For Modi

The Indian elections haven’t been held yet. But foreign money has been pouring into Indian equities, giving Prime Minister Narendra Modi a vote of confidence.

The SENSEX, which  has outperformed S&P 500 in the last five years , increased 2510 points or 6.92% since the beginning of 2019, reaching an all-time high of 39056.65 this week.

The recent rally has been driven by foreign money buying into Indian stocks, according to the Wall Street Journal. Foreign investors have been actively  buying Indian shares during Modi’s term, accounting for 27.5% of listed shares, according to Ted Bauman, an economist and senior research analyst at Banyan Hill Publishing.

Elections are closely followed by foreign investors, as they look for clues to policies that could fix the many problems that prevent emerging markets from achieving sustainable growth. Last fall, for instance, foreign money poured into the Brazilian market in anticipation that Jair Messias Bolsonaro would win the elections and pursue policies that could re-ignite the country’s economic growth.

They were right. Bolsonaro won, though it’s unclear whether his ambitious policy agenda will address the country’s chronic problems, and set the economy on a sustainable growth course.

Now, foreign investors anticipate that Narendra Modi will be re-elected and help ease tensions between India and Pakistan that pose a serious geopolitical risk for equity investing in the region.

“The current Indian stock market rally is based on a combination of the likelihood of the reelection of Narendra Modi and the rapid cooling of tensions between India and Pakistan,” says Bauman. “Investors are clearly happy that despite Modi’s nationalist ideology, he is uninterested in ratcheting up military tensions with his country’s nuclear-armed neighbor.”

Then there’s Modi’s administration affinity to the banking sector, which accounts for a big chunk of publicly traded equities. “Investors are also aware that Modi’s government isn’t shy about intervening to support Indian banks,” adds Bauman. “That’s why institutional investors in the Indian market are overwhelmingly concentrated in financials.”

And there’s Modi’s policy record. During his tenure, India’s economy grew at robust rates, beating mighty China. It climbed23 spots in the World Bank’s 2018 Ease of Doing Business ranking to the 77^th position, up from 100^thin 2017.

And that came on top of another jump of 30 spots in the 2017 ranking from the previous year.

That’s certainly great progress that set India apart from Pakistan and Bangladesh — which ranked 136 and 176, respectively.

Still, a vote of confidence by foreign money and a rally in Indian equities won’t help Modi keep his job. Equity ownership isn’t as widespread in India as it is in developed countries like the US.

“The Indian public only holds 7.9% of shares,” says Bauman. “The fortune of the average Indian household isn’t tied to the stock market in any way. Given that kind of ownership distribution, the “wealth effect” of rising stock prices is limited in India compared to the United States. A rise in the stock market doesn’t produce a corresponding rise in consumer expenditure, and vice versa, as it can in the United States.”

And it doesn’t affect the chances of Modi being re-elected.