Sunday, May 18, 2014

A new dawn in India and a new investment opporutunity

I don't know if people were paying attention or not but there was an election in India recently and it has the makings of a significant change in India's prospects. Hindu-nationalist, pro-business Narendra Modi was elected as prime Minister. In addition and just as important his Bharatiya Janata Party is on track to win 282 of the 545 seats in the lower house of Parliament. Assuming these numbers hold up it would give the BJP an outright majority in parliament, something that has not happened in thirty years. This election result would be analogous to Ronald Reagans victory in 1980 and the ushering in of pro market reforms in US which arguably led to a big economic boom in the US. Here is a decent article in the WSJ.

Mr. Modi was the former chief minister of Gujarat, in western India. During his tenure there economic progress was outstanding. Although there have been many critiques about how much of an influence Modi had on economic progress in Gujarat state the bottom line for investors is that we are concerned about changes at the margin. Throwing off decades of control by the socialist Congress Party and being an outspoken advocate for free markets is much more than a change at the margin. India will not turn on a dime as it is big complex country. There is still a huge inefficient corrupt bureaucracy that will not give up power or perks easily. It remains to be seen what initiatives Modi and the BJP roll out over the next months. I anticipate we will see that several stalled projects that got bogged down in red tape will get moving again. The government will be hampered by fiscal issues on how much it can do in the near term but clearing red tape and enticing business back to India is something Modi did in Gujarat and will do as PM.

The India stock market recently hit a new high but I took a position a couple weeks ago in the Mathews India Fund which is up 8% already. The fund requires a minimum holding period of six months and charges a penalty for early withdrawal. The fund managers focus on small to midcap Indian equities which require more precise research than I can do on my own. This is considered a long term investment. As I said earlier the complete landslide election of Modi and BJP is just the change at the margin I look for and I expect that views on India's economic prospects will change if the new government can deliver on its reforms.

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