Modi's mandate fills Indian managers with hope

Asset managers in India are optimistic that prime minister Narendra Modi will be able to solve structural issues that have hamstrung the domestic funds industry for years.

It comes after Modi’s Bharatiya Janata Party (BJP) became the first to win a parliamentary majority on its own in India for 30 years.

Ashu Suyash, chief executive of L&T Mutual Fund in Mumbai, reflects that the BJP has a decisive mandate to push ahead with the reforms necessary to promote the nation’s fund management sector and the economy.

“We hope the kind of political paralysis associated with a coalition government will go away, and that we will see strong execution by the [government] administration to steer change and put growth back on track,” she told AsianInvestor.

Suyash expresses the hope that Modi’s government will expedite implementation of the long-term development plan for the mutual funds industry as devised by the Securities and Exchange Board of India this February.

One proposal seen as key is to double the tax incentive for longer-term investment products, such as equity-linked saving schemes, to Rph200,000 ($3,400), from Rph100,000. These instruments typically come with a three-year lock-up period, and are expected to help encourage a longer-term investment mentality among investors.

Suyash also pointed to something else on her wish list that she argues could turn around the domestic funds industry, that regulations be liberalised to allow insurance companies to invest in equity or fixed income mutual funds

“As an industry we are hopeful that insurance companies will be allowed to give mandates to asset managers,” she says, noting that the investment of policy premiums at insurers remains purely an internal function rather than being opened out to third-party management.

Saurabh Nanavati, CEO of Religare Invesco in Mumbai, believes that if Modi’s BJP government can kick-start India’s economy by hastening reform in its July budget, equity investors could re-enter the market ahead of time by targeting current discounts.

“Retail investors are underinvested in the equity market, so they would need a better outlook on growth under the new government to re-enter,” he reflects. “The market should trade at a premium to the long-term average and over the next two or three years sentiment in favour of equities should be sustained.”

Fund managers have also long lobbied regulators on allowing them to offer long-term pension plans with tax benefits – assets that could help them to develop their institutional equity business.

Both the CNX Nifty index and S&P Sensex index have surged on sentiment this year, and that has gathered pace since Modi was sworn into office on May 26. Both blue-chip indices have risen about 16.5% since the start of the year, up to the close of trading yesterday.

Managers confirm that reignited retail sentiment for Indian equities has led to increased inflows into equity-focused mutual funds in recent months. In India, mutual funds account for just 2.5% of gross financial household savings.

Managers have been hoping for a turnaround in the equity market for the past few years, on the understanding it could stimulate greater interest among retail investors for mutual funds. Retail investors only account for one-fifth of industry AUM, by Cerulli Associates data.

In particular managers are seeking a better balance in AUM between fixed income and equity, which at present accounts for just 20% of the industry’s $161 billion in total AUM.

Strength in the two stock markets – which have both touched recent highs – has signaled to some managers that perhaps this time the tide is finally turning in their favour.

Credit Suisse recently upgraded Indian equities to outperform, from neutral, on the country’s improved growth trajectory and structural reform outlook following the landslide BJP victory.

The Swiss bank’s target of 27,000 points for the Sensex reflects a 12-month forward P/E of 16.5, based on 15% earnings growth. Currently it is trading at 15 times 12-month forward P/E on earnings per share of 15%. That is below the 20 times P/E seen in 2008, when earnings growth averaged above 20%.