There have been two stories for overseas investors putting money into Asia this year: China and India.
The two markets have been the destination for the bulk of the capital invested in the region by overseas investors. As India enters the fourth phase of its five-week balloting process here on Monday, with Mumbai taking to the polls, investors would do well to switch their focus away from China and to the Bombay and National stock exchanges of India.
Investors should note that the Indian markets appear to be pricing in a victory for the ruling BJP, or Bharatiya Janta Party. But the size of its majority and the long-term implications are likely yet to be recognized, with only a small selection of stocks rallying so far.
While a short-term event risk, the elections will soon conclude, apparently favorably for the agenda of business-friendly incumbent Prime Minister Narendra Modi. According to the election watchers at Société Générale, market prospects are well-supported by a recovery in earnings and the start of a new cycle of capital investment by industry.
The results of the 39-day election, where voting ends May 19, will be announced on May 23. The extent of Modi's victory will tell us just how strong his mandate is to continue his path of private-sector reform.
Both the BJP and the main opposition, the National Congress Party, courted rural voters in the run-up to the election with populist policies and platforms. But the BJP is only moving in that direction thanks to the pull of the left-leaning Congress.
The Congress has pledged what amounts to a universal basic income, promising to transfer up to 6,000 rupees (US$86) per capita per month to 20% of the population. That would boost the income of the country's poorest citizens to 12,000 rupees (US$172) per month. But it has not announced how it will find anything like that kind of money.
China was first port of call for overseas cash this year, attracting heavy inflows in January and February. But we're in a holding pattern on China. Absent any clear conclusion from the U.S.-China trade talks, or even what they're talking about in the first place, it's hard to make any calls on the effects of the talks on the Chinese economy and stock markets.
The initial "elation" in Chinese stocks, which has turned them into this year's best performers after a world's-worst performance in 2018, is "quietly winding down," according to Nomura's quant strategy team. The investment bank's Chinese equity market sentiment index turned south in March after a strong rally since the start of the year.
With the CSI 300 index of the largest stocks listed in Shanghai and Shenzhen looking at gains of 29.6% for the year so far, it's tempting to wonder if it is tapped out. The index is down 5.3% since its peak on April 19.
Indian stocks have attracted huge amounts of capital in recent weeks. Overseas investors pumped US$4.89 billion into Indian equities in March, the most since February 2012. When you consider that those international investors had net purchasing of US$4.96 billion for the whole of Asia that month, India was the only game in town.
Yet Indian equities have played catch-up, underperforming global markets and only beginning after February to mimic the China-inspired rally in Asia that has run all year. The Sensex index of large-cap Indian stocks is up only 8.3% in 2019, still trying to recover from a dip that occurred when India's conflict over Kashmir with Pakistan turned hot in late February.
Foreign investors have been net short of Indian equities since the third quarter of last year. The positions moved net long in March. The pattern is opposite to the results of the last election in 2014, when net long positions reduced as elections loomed.
Volatility has also dropped in the past couple months. Both volatility's decline and the bullish set to positions reveal that international investors are more certain of Modi's re-election than they were of his election in 2014, when it surprised everyone that the BJP won an outright majority. Every other recent election has resulted in a coalition being formed.
It would be market-positive if the BJP can win another landslide and form its own government without the need for the participation of allies such as the Hindu nationalist party Shiv Sena. There's still room for a positive market shock in that respect, SocGen says.
Investors should focus only on big-cap stocks in India. The BSE Sensex has been the destination for almost all the inflows from overseas. Mid-cap Indian stocks are down 15% from their peaks and small-cap Indian stocks are off 25%.
Once the elections are over, it's likely that Indian large-caps are on a medium-term uptrend. SocGen advises buying into any corrections. At a sector level, it advises targeting consumer discretionary stocks such as autos, which have underperformed thanks to tighter credit, higher fuel prices and tougher regulations in the sector. The BJP will still seek to boost rural consumption, boding well for consumer discretionary stocks as a whole.
Capital-intensive manufacturers should also benefit as Indian industry grows confident enough to invest in capital expenditures. Total investment as a share of GDP has rallied from a low in 2016 and seems to be on a secular uptrend through 2021 and beyond.