After months of global speculation and opinion polls on India's
multi-phase general election, Bharatiya Janata Party (BJP) -- led
by Narendra Modi-- has finally emerged a clear winner. According to
the election results on May 16, BJP alone will likely win around
280 seats, accomplishing the 272 goal - the minimum number required
to form the government in India.
Most importantly, this landslide victory will give BJP the
governing power without any coalition. India will see a majority
government for first time since 1984 (Read:
India ETFs: Can the Surge Continue after
BJP's prime minister candidate, Narendra Modi - the chief minister
of the state of Gujarat for three terms - is seemingly a pro-growth
politician. Under his leadership in the 2000s, Gujarat grew at a
against the national average of 5.6%.
The world is now expecting Modi to reproduce his 'Gujarat-model' on
the national level and free India from sky-high inflation, slowing
growth, current account deficits, lower per-capita income and
massive corruption. Last year, Goldman Sachs also "modi-fied" or
rather upgraded its view on India on Modi's potential win (read:
India ETFs in Focus on Goldman's Upgrade
In fact, the Indian market has been taking one lap after another in
its bull run since the beginning of this year on the hearsay of a
governance change and finally hit an all-time high on hopes of
'Modinomics' at the time of writing in the intraday trading session
on May 16.
A barrage of foreign capital inflows and a weaker dollar had pushed
the Indian currency rupee to the 9-month high level against the US
dollar. After sinking to 69 per dollar, Indian rupee has shot
up to 58.72 on mid-day session.
This year, all the India ETFs have showered double-digit gains on
investors. Small-cap ETFs benefitted the most as this
capitalization is normally sensitive to domestic events. Two
small-cap India ETFs -
India Small-Cap Index ETF (
India Small Cap ETF (
-are up 23.4% and 21.4%, respectively (read:
Time for the India Small Cap ETF (SCIN)?
How Long Can Modi Pull Up India ETFs?
While the global market seems completely mesmerized by Modi, it
should also consider the other factors that contributed to India's
bull run. India's policy to tighten gold imports has done a lot to
contain the nation's current account deficit this year.
The rupee also brightened up in the past few months on a slightly
subdued dollar. Some of the country's central bank's measures,
including rate hikes, also pulled up India's economic indicators to
While there is no doubt that Modi's win will favor some reformative
measures in India in the coming days, some analysts see this
publicity as overblown. According to them, although Gujarat's
performance was pretty strong in the last decade, states like
Maharashtra had better growth figures.
Even underdeveloped regions like
Bihar and Uttarakhand
saw higher growth, per the source. Moreover, even before the Modi
regime, Gujarat was doing well. The state reported 4.8% growth in
1990 against the national growth rate average of 3.7%.
Stubborn inflation is one of the biggest culprits of India's bleak
economic picture. Notably, India's April consumer inflation
is hovering at a three-month high level due to flared up food
costs. In fact, thanks to the recent prediction of poor
monsoon this year, India is due for another round of food price
inflation in the coming months.
India's industrialists hope for some rate cuts by Modi who is
perceived as an investment-friendly leader, but the heightened
inflation might come in that way. India's key benchmark interest
rate is presently 8%. Any cut in key interest rate will
blow up the inflation numbers (read:
India ETF in Focus on Recent Rate Hike
). Also, industrial output was sluggish in the past few
months resulting in softer GDP growth.
Added to these, the influence of global issues on the emerging
markets is undeniable. The most serious among these is the fear of
an eventual interest rate hike in the U.S. that would prompt
massive emerging market sell-offs. And currency woes and current
account deficit concerns will also be back then.
In such a conflicting scenario - somewhat similar to the Brazilian
economy - investors would like to see how the Modi government spurs
economic growth. While Modi does not surely have any magic wand to
tackle these core issues overnight, even gradual recovery or at
least the announcement of some reformative measures would spread
cheer among investors.
No doubt, India ETFs are at present trading at an exorbitant
valuation having topped the entire emerging market equities ETFs
table in the past one month frame. Also, even after a
sweeping win, much of the Modi-mania seems to have already been
reflected in India ETFs. And we believe there is not much room for
further run. The hope bubble could burst soon.
At the time of writing, SCIN added 5.32% in pre-market hours,
WisdomTree India Earnings
added 2.80% and SCIF added 4.98% following the news of Modi's
colossal lead. But how long will the rally continue? It has to end
India ETFs will now be risky to play. So investors with a strong
risk-appetite can stick to these ETFs and those with weak nerves
should book profit. Most of the ETFs have reached an overbought
Though there are still some hopes as our Buy-ranked ETF
is trading at a lower trailing 12-month P/E ratio than the biggest
emerging market ETF
iShares MSCI Emerging Markets
), implying some more gains. More than Modi, the end of a
government under which the Indian economy started to slump should
give a new lease on life in the coming days.
The risks are, however, quite high as the market is not at all
cheap. It is advisable to leave the market now with the profits
that it offers. And since BJP's single-handed historic victory
should bring all its promised growth-reforms without any
resistance, this economy should offer many new money-making
This is only the start of the Modi era, and investors can enter
again when the new government shows fresh growth avenues.
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ISHARS-EMG MKT (EEM): ETF Research Reports
WISDMTR-IN EARN (EPI): ETF Research Reports
IPATH-MS INDIA (INP): ETF Research Reports
PWRSH-INDIA POR (PIN): ETF Research Reports
MKT VEC-INDI SC (SCIF): ETF Research Reports
EMERG-GS INDIA (SCIN): ETF Research Reports
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