
The recent Indian elections have prompted investors to reevaluate the premium attached to Indian stocks, often referred to as the "Modi premium." This premium has historically been justified by the promise of policy reforms and robust economic growth under Prime Minister Narendra Modi's leadership. However, with Modi's party facing challenges in securing a strong mandate, concerns have arisen regarding the sustainability of his reforms amidst coalition politics.
Investors are now scrutinizing whether Modi can uphold his reform agenda while balancing the demands of coalition partners and avoiding populist measures to regain public support. This shift in focus towards policy continuity is crucial for global investors considering investments in India, the world's fifth-largest stock market.
Foreign investors have shown skepticism by selling off Indian shares, despite local funds and retail investors driving the benchmark Nifty 50 Index to a new record high. Modi's tenure has been characterized by political stability and policy continuity, making India an attractive investment destination despite expensive valuations. However, with the forward price-to-earnings ratio of the MSCI India Index at around 23 times, the market is one of the most expensive globally, leaving little room for disappointment.
A significant risk lies in potential policy-making slowdown under a coalition government, where Modi may need to make concessions to alliance partners to maintain their support. Investors are closely watching key ministries like finance and infrastructure to assess the credibility of the leadership.
There's also a concern that a reduced mandate could lead Modi to announce populist measures, potentially diverting attention from infrastructure development, which has been a priority. Despite these challenges, some global funds view any weakness in Indian stocks as a buying opportunity, considering India's promising economy driven by a growing middle class and strong demographics.
Historically, Indian stocks have performed well under coalition governments, suggesting that despite potential policy slowdowns, the pro-growth and investor-friendly agenda of Modi's party may continue. However, some investors are adopting a more defensive stance, focusing on buying quality businesses at reasonable prices until there's clear evidence that growth-focused policies will persist.
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