Is the market really upset with the government for not doing enough for the economy?
So far, the new government has done nothing but talk, and it is a shame because (Prime Minister Narendra) Modi had experience; he said he knew what needs to be done. He campaigned for many months saying he knows how to fix India, but he has done very little." This is how veteran fund manager Jim Rogers, in an interview with Mint last week, assessed the performance of the Modi government, which will complete its first year in office next month. Rogers also added that he was getting disillusioned about India. (See: So far, the Modi government has done nothing but talk: Jim Rogers, 23 April.) Rogers is not the only one who is readjusting expectations; other investors, too, are doing so. The CNX Nifty, after touching an all-time high in March, is down about 10% since, and technical analysts are suggesting that it may fall further. So, is the market really upset with the government for not doing enough for the economy?
Many people in the market expected things to change dramatically after the Modi-led National Democratic Alliance government took office. In fact, the momentum in the market started building long before the first vote was counted on 16 May 2014. As a result, the benchmark indices gained about 30% in 2014, making it the best year for Indian equities since 2009. But in 2015, investor confidence seems to be dissipating, at least in some sections. Markets have fallen in recent days; the year-to-date gains for Nifty is almost nil. This is bound to make some investors nervous, especially those who came in late, and with hopes of making quick money.
However, the basic issue is that companies’ earnings haven’t matched the expectations of investors and analysts. The quarterly result announcements for the three months to March have so far been disappointing. An analysis published by this paper showed that the aggregate net profit of 101 companies that have declared their numbers fell by 9.23%, their worst performance since December 2012 (see: Fourth quarter results paint a grim picture, 27 April).
But this performance is not necessarily a consequence of what the government has done (or not done) since coming to office. For example, the uninspiring show by companies in the information technology business practically has nothing to do with how the government has performed over the past one year. The basic problem is that the turnaround in corporate profitability is taking more time than analysts had expected and, as a result, some investors are once again beginning to see other structural problems in the economy. “Even if Modi comes through, India’s bureaucracy is so entrenched, so powerful and so staggering. India does not have the education, infrastructure and work ethic that China does. India is a chaotic democracy—democracies can be extremely successful, but not chaotic democracies. In my view, India is not a terribly rational country. I would suspect more and more people in India will start to get impatient, and not just its youth who need jobs," Rogers said in the above-mentioned interview. Clearly, these problems are not new, but if some investors expected these conditions to change in a year, they probably need to recalibrate their investment strategy.
Investors, overwhelmed by the Bharatiya Janata Party’s majority in 2014 election, had pushed stock prices and valuations in the expectation of big bang reforms and a possible cyclical upturn in company earnings. And both didn’t happen. On the economic reforms front, it is now clear that the government will move incrementally. In fact, the Economic Survey 2014-15 argued that big bang reforms normally happen in crisis situations. “Much of the cross-country evidence of the post-war years suggests that big bang reforms occur during or in the aftermath of major crises…. India today is not in crisis, and decision-making authority is vibrantly and frustratingly diffuse," said the survey.
An incremental approach is not a bad thing, provided there is steady movement because in the end it all adds up. Investors can always argue that things could have been better, and they will not be entirely wrong, but it is also true that there has been progress on the policy front. In addition, lower oil and commodity prices have helped. But it appears that earnings revival will take longer than analysts have been anticipating. Crop damage due to recent unseasonal rains and the possibility of a poor monsoon can delay the process. This can also shift resources and government attention to the rural economy, which can affect market sentiment in the short run.
At a broader level, investors shouldn’t worry too much about the ongoing correction in the market as it will take out some froth and open up opportunities to buy good stocks at reasonable valuations. Seasoned investors, both domestic and foreign, would agree that India is a long-term story. Indian markets have satisfactorily rewarded long-term investors in the past and there aren’t sufficient reasons to believe that they won’t in the future.
In fact, conditions in 2014 weren’t as good as markets were portraying them to be and, perhaps, they are not as bad as some commentators are interpreting them to be this year.
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