For Investors, Modi 2.0 Has Made India Too Expensive

Investors are spending a lot of money to be in India. This year, it hasn’t been worth it.

Prime Minister Narendra Modi’s party, the Indian People’s Party (BJP), won their reelection bid handily this year, keeping Modi in power. He remains popular in India and among investors. But his second go-round has been much less interesting to Wall Street. India is underperforming the emerging markets by over 700 basis points. To make matters worse, the Sensex is trading at multiples higher than the S&P 500.

For comparison, the Sensex is trading at 28 times earnings. The S&P 500 is trading at 20.9 times.

Within the big four emerging markets, Brazil’s Bovespa Index is trading at 17.4 times; The Moscow Russia Index is trading at its usual sub-10 rate, this time at just around 7 times, and the Shanghai Composite, hit by the trade war, is trading at a low of 14 times.

The rupee is also holding its own against the dollar. It’s weakened around 2% year-to-date, making it the second-strongest BRIC country currency after Russia’s ruble, which has actually gained 8.2% against the dollar this year.

For Investors, Modi 2.0 Has Made India Too Expensive

The Sensex Index is up 12.13% year-to-date ending Friday December 6. The bank-heavy MSCI India is up … [+] just 3.2% in dollar terms while the Wisdom Tree India is a money loser. Meanwhile, the MSCI Emerging Markets is up over 10%. India remains one of the most expensive markets in the world.


India’s economy is growing less. GDP growth rose 1% in the second quarter of 2019. Annualized growth as of September was 4.5%, the lowest in the Modi era. Only China’s quarterly GDP is in decline and its stock market is priced lower because of it. Not so with India.

“We are underweight India because it’s just too expensive and the growth isn’t there,” says Tom Wilson, head of emerging markets equity for Schroders in London.

India has been the drama-free emerging market since Modi took over in 2014. Investors like his reform push. But right now, India has hit a wall.

For Investors, Modi 2.0 Has Made India Too Expensive

India’s Finance Minister, Nirmala Sitharaman: working on simplifying the tax code, but no word on … [+] additional tax cuts. Modi cut taxes earlier this year.

Himanshu Bhatt/NurPhoto via Getty Images

Former central banker Raghuram Rajan rang alarm bells last week, saying India’s real estate, construction and infrastructure industries were “a ticking time bomb.”

Rajan said non-bank finance companies that lend to these sectors should have their asset quality reviewed.

Rajan’s comments will register negatively with domestic investors who have grown accustomed to India’s banks facing duress due to bad loans. India’s banks have been cleaned up, for the most part.

Over the weekend, India’s Finance Minister Nirmala Sitharaman said the government was working on more steps to revive the economy, including changes to the personal income tax code.

“It’s one among many things that we are thinking of,” she told reporters on Saturday in New Delhi, the Press Trust of India newswire reported.

India is part of the middle-class consumer growth story among emerging market money managers. It’s what every body likes about it. Indexes heavily weighted to banks and industrial firms risk losing out on the consumer stocks that have been pushing India’s earnings multiples higher than the competition.

For example, Tata Global Beverages is up 43% year-to-date in rupees. But that’s not the whole story. Hindustan Unilever shares are up 11.4%, undeperforming the Sensex, while Reliance Industries and ICICI Bank are up 38% and 45% year-to-date, causing many India-bound investors to scratch their head and wonder why India overall has been a dud investment in 2019.

Consumer confidence in India is at its lowest level since 2014.

Despite a decline, consumer confidence remains solid at 85.7 in November from 89.4 in September, according to the Reserve Bank of India’s consumer confidence survey.

The future expectations gauge—which forecasts economic sentiment for 12 months out—fell to 114.5 from 118.0. Anything over 100 is strong.

Sitharaman hinted that tax changes didn’t necessarily mean additional tax cuts, something equity managers love. She said the intent was to further simplify India’s tax code, including removal of exemptions, which some may consider a tax hike.

Modi announced changes to the corporate tax rate this year, with a simplified 15% rate for newly launched manufacturing companies.

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