Noble Apex eNewsletter Issue 810- Our initial thoughts after India’s election

2019-05-27 11:19
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27 May 2019 Issue 810

Global Market Commentary


  • US: The Sino-US trade talks become tense again, and the United States further banned the products of Huawei. For the week, the Dow fell by 0.69% to 25,585.69. The S&P 500 index fell by 1.17% to 2,826.06. The Nasdaq fell by 2.29% to 7,637.01 points.
  • Europe: Since the tense relations between China and the US, and the resignation of British Prime Minister Theresa May, the market is worried about the economic prospects of the Eurozone. For the whole week, the UK’s FTSE 100 index fell by 0.96%, the German DAX index fell by 1.86%, and the French CAC40 index fell by 2.24%. The STOXX 600 index fell by 1.47% for the week to 375.89 points.
  • Asia: The Sino-US trade talks become tense again, and the United States further banned the products of Huawei. For the whole week, the Nikkei 225 index rose by -0.63 % to 21,117.22 points. The MSCI Asia Pacific Index fell 0.51% to 153.20 points.


  • US: Due to the escalating conflict between China and the US, funds flows into the bond market. For the whole week, the yield on the US 10-year government bond fell by 8 basis points to 2.320%.
  • Europe: Capital flows into the bond market as the market is worried about the economic prospect of the Eurozone and the Sino-US trade war situation. For the whole week, the German 10-year bond yield fell by 1 basis point to -0.118%.


  • Oil: US’s crude oil inventories rose to its highest level since July 2017. Besides, it is worried that the crude oil demand will decrease due to the tense relations between China and the US on the trade issue. Over the week, New York oil futures fell by 6.82% to close at $58.63 a barrel.


  • US dollar: The latest US economic data is poor, reflecting that the economy is slowing down. According to the JPMorgan economists, the US GDP’s growth rate in the second quarter of 2019 was reduced from the original estimation of 2.25% to only 1%. For the whole week, the Dollar Index fell by 0.390% to 97.613.
  • China: The People’s Bank of China (PBOC) set the mid-point of the RMB exchange rate at a higher level than expected for three consecutive days in last week, helping to stop the decline of the yuan. For the whole week, the yuan rose by 0.210% against the US dollar to 6.900.


Economic-related News

  • US: US durable orders in April tumbled, indicating a bleak economic outlook. JPMorgan Chase lowered its second-quarter economic growth forecast from 2.25% to 1%.
  • US: Media reported that the US Securities and Exchange Commission investigated whether Boeing properly disclosed the problems associated with the grounded 737 Max jetliner.
  • U.S: Trump ordered an increase of 1,500 troops to the Middle East. Given the small size, the move may indicate that the United States wanted to avoid further escalation of tensions. Earlier, the Pentagon accused Iran of attacking on tankers and pipelines in the Middle East.
  • Euro-zone: British Prime Minister Theresa May decided to step down on June 7. Boris Johnson said he hoped to be pragmatically separated from the EU, but as a negotiating tactic, the UK must also prepare for a non-agreement to leave the EU.
  • Euro-zone: The British Bureau of Statistics announced that after seasonal adjustments, UK retail sales in April grew 0%, but still better than market expectations of a 0.3% decline.
  • Euro-zone: The Conference Board data showed that the UK’s March Conference Leadership Indicator (LEI) decreased to 93.6, falling eight consecutive months.
  • Japan: US President Trump, who was visiting Japan, said that the US-Japan trade negotiations have made significant progress, but the trade agreement may be reached after the Japanese election in July.
  • Japan: The Ministry of Economy, Trade and Industry announced that after seasonal adjustments, Japan’s industrial production index fell 0.6 points, leading to the combined index dropping by 0.4 points to 105.6, worse than market expectation.
  • Singapore: Singapore’s industry and trade department and Monetary Authority (MAS) jointly announced that Singapore’s April consumer price index (CPI) rose from a previous value of 0.6% to 0.8%, in line with market expectations.


China Market Commentary
Economic-related news
• Huawei’s president Ren Zhengfei said in an interview last week that Although Trump administration export curbs would cut into a two-year lead Huawei had painstakingly built over rivals like Ericsson and Nokia, Huawei would accelerate its development of its own chip supply or find alternative channels, so as to maintain the advantages of smart phones and 5G.
• Chinese Premier Li Keqiang said that the government will ensure that large-scale tax cuts could enhance corporate confidence and achieve sustained economic growth.

Our initial thoughts after India’s election

The long-awaited results for India’s Lower House (Lok Sabha) elections finally came out last Thursday with the Prime Minister Narendra Modi led his Bharatiay Janata Party (BJP) to a landslide victory for a second consecutive term in office, leaving the opposing Congress far behind.

The Modi-led National Democratic Alliance (NDA, i.e., BJP+allies) won a total of 353 seats in the election (out of a total of 543) compared to 336 in the last parliament election held in 2014, while the BJP on its own won 303 seats this time, already exceeded the required majority of 272 seats, and also much better than the 282 seats last time. With a clear and decisive mandate for India’s ruling coalition, Modi promised to build a strong and inclusive nation and has assured investors of stability and policy continuity in Asia’s third-biggest economy.

What will PM Modi do?

Given Modi’s strong mandate, market expectation of big structural reforms has been increasing since the election results out. Labour is one of the key areas as unemployment rate in India has increased dramatically to over 6% last year from merely 2-3% in 2011. In fact, Modi’s government has been working on the new industrial policy 4.0 as to improve the competitiveness of manufacturing and services industries, especially he wants to take advantage from the long-term trend of a manufacturing shift away from China. The policy permits easy hire-and-fire policies and has proposed higher minimum wages and availability of medical facilities for workers. We can also expect the labour law and codes will be more simple and clearer in future.

Another major reform area should be on land as high acquisition cost and availability of land have always been the problem in India. We believe Modi will try to increase the transparency of land auctions and to introduce digitization of records to improve efficiency and fairness.

Privatization of SOEs will be another important reform that markets will hope for from the Modi government, in particular for the banking industry. India’s banking system has been undergoing a large cleansing exercise, with huge recapitalization of SOE banks, while there is protracted insolvency issue in the non-bank financial companies (NBFC), which in return crippling the flow of liquidity in the system. Moreover, despite India’s SOE banks hold large market share in deposits, they are unable to increase their lending given poor capital adequacy ratios. As a result, market generally believes India’s SOE banks have to restart lending and the Modi government should consider recapitalize SOE banks, which is still unclear at the moment.

A key hurdle for the major reforms mentioned above as it requires a majority vote in both houses of Parliament, in which NDA still remain in a minority in the Upper House and needs an additional 21 seats to gain majority. However, with 85 members of Upper House due to retire by end of 2020. The NDA could have a chance to gain majority in both houses by that time.

Will India stock market continue to outperform post-election?

Over the last three months, Indian equities have seen a pre-election rally with MSCI India outperforming the broader MXAPJ region by 15ppt or 3.5ppt YTD. The current outperformance was in-line with what we expected and may continue for the next few months as we suggested in our previous article in February – “Is it a good timing to re-enter the India market now?”.

In fact, India equities has experienced multiple re-rating over the last five years (from 14X to 18X P/E), despite muted earnings growth as investors have high expectation about India’s long-term growth potential. Meanwhile, markets have revised up Indian equities earning growth by around 1-2ppt to 19% and 18% for this year and next year (vs. 3% and 10% for MXAPJ for CY19/20), reflecting that PM Modi to roll-out more reforms after the election. However, with India equities are now trading at 18.0X forward P/E, which is at the higher end of the historical range and at 40% premium to the MXAPJ region, we see India’s market valuation is fair and expect the near-term upside is limited at around 10% only.


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