If history is a guide, India's stock market will rally after that country's parliamentary elections April 27 - despite expectations that a coalition government will replace Congress-I, the current party in power.
If this election result is borne out, investors arguably could anticipate slowed economic reforms and perhaps more political gyrations.
But good news on the economic front might overshadow election results. Optimists, some of whom already have been buying, believe that once the election is over, investors will zero in on economic fundamentals and will like what they see: relatively cheap stocks and robust corporate earnings.
For example, earnings this year should jump anywhere from 22% to 30%; and next year, they should advance almost as much. As an added plus, now-tight monetary policy should be eased after the election, giving the market a liquidity boost.
These and other incentives propelled Pioneering Management Corp., Boston, to become "hugely" overweighted beginning in November, said portfolio manager Manish Modi. Now India represents about 11.3% in its emerging markets fund and 5.6% in its international growth fund. That compares with a zero weighting to Indian in the Morgan Stanley Capital International Europe Australasia Far East Index and a 1.9% exposure to India in the International Finance Corp.'s investible index. Moreover, the Pioneer India fund, which had 30% in cash a year ago, is nearly fully invested, Mr. Modi said.
"Yes, there was bad news out there, but the bad news was not there to stay," he said. Mr. Modi believes that "with the election out of the way, there will be renewed focus on economic development" in India.
Although everyone isn't quite as bullish as Pioneer, interest in India is decidedly increasing. Seligman Henderson Co. in London is buying Indian stocks, said Iain Clark, chief investment officer; he sees no reason the India exposure in the fund's Horizon Emerging Markets Fund couldn't reach 8% to 10% from its current 5% level. As attractions, Mr. Clark cited valuations and an expectation that the market could rally in line with corporate profits growth.
IDS International in London also is "headed toward a larger exposure to India," said chief investment officer Paul Hopkins. Thus far, the firm has had only a small exposure to that market - obtained through investments in closed-end funds - as IDS geared up on coverage of India. But now resources are in place, and the market is looking "interesting" after its poor performance last year, he said. Thus, IDS expects to increase its weighting soon, either before or after the election, he said.
Ahead of the elections, London-based Foreign & Colonial Emerging Markets Ltd. is overweighted in India, said Jeff Chowdhry, fund manager for India. He cited two main reasons: historical evidence that the market rallies after national elections, as it did in 1991, 1989 and 1984; and an expectation of easier monetary policy, because the government has reduced inflation to 4.5%, a six-year low. On top of those "bullish cases, the broad market is extremely cheap and is now selling at 10 times March 1997 earnings," he said.
Hugh Ferrand, portfolio manager of Blairlogie Capital Management, Edinburgh, Scotland, explained the corporate profit attraction in India. In 1995, he said, earnings were boosted by the huge amount of income companies derived from issuing global depositary receipts in 1993 and in 1994 that initially was put in high interest-bearing accounts.
Although some of this money has been directed to corporate expansion projects, corporate earnings should continue to advance as economic reforms spawn higher operating profits.
"India is structurally opening up," Mr. Ferrand pointed out. As reforms fuel overall growth, "companies can't produce enough cars, scooters and the like to feed demand." Although "for example, auto companies are putting in a huge amount of new production capacity," it will "take until 1996-1997 to feed through." The conclusion: that operating earnings should continue growing. As a result, Blairlogie continues to be overweighted in India.
Investing through GDRs, Mr. Ferrand likes such companies as Tata Engineering & Locomotive Co. and Bajaj Auto Ltd. in the automobile sector and Century Textiles and Hindalco Industries Ltd. among conglomerates.
To Mr. Ferrand, the election's results shouldn't drive away investors. While the pace of reforms might slow, he believes India "won't turn back the clock to pre-1991" times when protectionism and socialism held much more sway. Now, many observers believe, India must continue liberalizing, making its huge marketplace increasingly accessible and attractive to investors.
But so far, this process has met considerable political opposition; and some fear a new coalition government would have less of a mandate to push reforms. If so, investors might see delayed efforts on trimming the federal budget deficit, which could fuel inflation.
Last year, a power plant being built by a consortium made up of Enron Corp., Houston, Texas, and others was canceled temporarily. Two Kentucky Fried Chicken restaurants, one in Bangladore and another in New Dehli, also became the targets of protests by nationalist groups in India last year. Earlier this year, the KFC restaurant in Bangladore was ransacked. Such episodes reflect the concern among some factions in India about foreign business influence.
Such episodes might make some foreign direct investors wonder about their welcome.
Some investors remain nervous. For a variety of reasons, Todd Marvin, vice president of Marvin & Palmer Associates Inc., Wilmington, Del., believes "the jury is out on India." Unlike many countries, "it's not clear that India has entered its takeoff phase," he said. Mr. Marvin cited political interests that keep "policies from being as pro-capital as they ought to be" and insufficient domestic savings to "drive growth as they do in other parts of Asia."
For these and other reasons, his firm's emerging markets portfolios remain neutrally weighted to India.
Thomas Tull, managing director of Gulfstream Global Advisors in Dallas, Texas, is slightly underweighted.
"Yes, India's market is cheap. The GDR premiums have fallen" from highs earlier this year, he said. But interest rates remain high, and election uncertainty is taking a toll in the run-up to the vote, he noted. And on a macroeconomic view, Mr. Tull noted India "still has many socialist overtones and continues to be rocked periodically by politics."
Therefore, in a choice between China's and India's markets, Mr. Tull prefers China, which is "more accepting of foreign investment."