Investment implications
Despite some disappointing policy setbacks that have caused some loss of faith in the Modi government, we still believe reforms are moving at a steady pace, even if more has to be done. The large scope of reforms initiated and the lack of any corruption scandals so far bodes well for Mr. Modi and his government. A pick up in investment and positive impact of reforms should eventually turn markets around. Our medium- to long-term outlook is still highly positive on India.
While valuations are a bit stretched and trading above historical average, the key headwinds for India equities are weak 1Q earnings and the negative earnings revisions.
However, we are seeing diverging sector performance, with certain sectors performing relatively well (e.g., financials) in response to Modi’s bank account reform for rural population. In order for markets to respond positively and valuations to be re-rated, Modi’s administration will have to put forth extra effort and deliver what has been promised.
