Investors inclined towards a BJP win in 2014 election: CLSA

CLSA highlighted a wave in favour of Narendra Modi as one of the probable reasons for BJP winning 202 seats in the 2014 election. Photo: Mint

New Delhi: Opinion polls may be unreliable, but the markets favour the main opposition Bharatiya Janata Party (BJP) over the Congress party-led United Progressive Alliance (UPA) government to win next year’s general elections, Hong Kong-based securities house CLSA Asia-Pacific Markets said on Monday.

“It is clear that the market favours one outcome over another. It is their right to do that,” Christopher Wood, equity strategist at CLSA, told reporters at the CLSA India Forum in New Delhi.

The brokerage, in a presentation, also projected the state-wise performance of BJP and the probable reasons for it securing 202 seats in the 2014 election: a wave in favour of the party’s prime ministerial candidate Narendra Modi; the appeal of Modi to urban voters; anti-incumbency; polarization; and the strong performance of BJP state governments.

No such scenario was envisaged for the Congress.

CLSA’s view is that India’s “six-month story” is uncertain, but the securities house is optimistic about the country’s “two-year story”.

Among the negatives, CLSA listed fiscal pressure, a weak currency, slowing growth in consumption, political uncertainty and a possible downside to 2014-15 corporate earnings. Among the positives it listed an “uptick” in the investment cycle in 12-18 months, the direct benefits transfer scheme that it called a “bold new reform”, the superior performance of the Indian IT sector, and the fact that banks are becoming aggressive about recovering their dues.

But the securities house’s most controversial analysis is likely to be what it called its “BJP 2014 Blue Sky” (projection).

CLSA India Ltd’s executive director Mahesh Nandurkar explained the rationale behind providing such a projection and said it was because of “a lot of investor queries”.

“I haven’t seen this kind of interest in Indian politics from global investors,” he said.

The Congress has been critical of such analyses in the backdrop of a 7 November report by financial services firm Goldman Sachs Group Inc.which stated that an upgrade in India’s investment prospects was possible if a coalition led by BJP comes to power, and may fuel investment demand, particularly in infrastructure.

In response to the Congress party’s reaction, Wood said, “That happens all over the world. We have no issue with that.”

CLSA’s presentation dovetails with assembly elections in four states—Delhi, Rajasthan, Chhattisgarh and Madhya Pradesh—that are seen as a direct contest between the Congress and BJP.

“I think banks like Goldman Sachs should stay focused only on doing what they claim to specialize in,” trade minister Anand Sharma was cited as saying in The Economic Times on 8 November.

“Goldman’s latest report on Indian economy and its eagerness to push the case of a particular political leader and his party exposes two things—Goldman is parading its ignorance about the basic facts of Indian economy; and it also exposes its eagerness to mess around with India’s domestic politics. It only makes Goldman’s credibility and motives highly suspect,” he said.

The reference to a particular political leader was to Modi, the Gujarat chief minister who is spearheading the BJP campaign in the state elections after being anointed as the party’s prime ministerial candidate in the next general elections.

“Rather than appreciating the message, they are going after the messenger,” Rajeev Malik, senior economist at CLSA Singapore Pte. Ltd.

Some opinion polls have projected BJP under Modi as the front runner in next year’s general election, but Wood cited a history of such polls going wrong in predicting electoral results.

“Opinion polls represent an urban electorate rather than a rural one. From the sentiment stand point, opinion polls are important, but from the fundamental standpoint it is the investment cycle (that is important to the markets),” he said.

India has witnessed a debate on opinion polls, with the Election Commission having written to the ministry of law and justice for a ban on the publication of such surveys from the date of notification of elections.

India’s economic growth slowed to 5% in the year ended 31 March, the slowest pace in 10 years, and is forecast by some economists and international agencies to slow further in the current fiscal year. Economists have blamed the stalling of economic reforms during much of the UPA government’s second term in office for the slower pace of growth. And many investors have decided they are better off waiting to see who comes to power in next year’s general election rather than taking an investment decision now.

“The tone and agenda will be set up by the next government,” Malik said. “The political will is not there. It is an inefficiently run economy and any kind of incremental improvement will have a constructive role.”

Indeed, nothing is happening because corruption had become the standard way of getting things done, explained Wood. And everything has come to a standstill in the absence of any other way of getting things done. The ruling UPA government has been roiled by several corruption scandals related to irregularities in the allotment of spectrum, coal mines, and organizing the Commonwealth Games.

CLSA is of the opinion that India’s current account deficit, which rose to a record 4.8% of gross domestic product (GDP) in the last fiscal year, makes the economy vulnerable to overseas investor sentiment. The Reserve Bank of India expects the deficit to narrow to around $56 billion, or less than 3% of GDP, in the current year.

CLSA said the deficit makes the Indian economy prone to global shocks.

The rupee has lost 11.89% against the dollar since January, the third most after the Indonesian rupiah and the Japanese yen in Asia, and closed on Monday at 62.42 per dollar, strengthening after US Federal Reserve chairperson nominee Janet Yellen said she will continue the $85 billion a month asset-purchase programme.

“The corporate sector has borrowed a lot of dollars. They have also borrowed a lot on the private side and pledged their shares. Most of these firms expected that the rupee wouldn’t cross to the other side of the 60s. There is more dollar borrowing in India as compared to the South-East Asia,” Wood said.

CLSA believes the rupee will weaken.

“During 2002-07 was the only time that the rupee appreciated. This is a currency that is trying to correct itself to pre-2002 levels,” Malik said.

Malik sounded a cautionary note on India’s future growth. “The bottom line is it will be a graded protracted recovery. While a subdued global growth and easy liquidity benefited India earlier, even if India’s growth improves, the global liquidity environment is a concern.”

Wood, though, was optimistic about India’s future prospects. “The best companies in emerging markets are in India,” Woods said.

source:- livemint