A general take on the Modi-phenomenon that has swept the stock markets! With structural changes finally being implemented by the new government we can expect a decade of massive growth. First uploaded as an Instablog on SeekingAlpha in September

1. Vibrant India : Indian ETFs can scale new heights
The economy is recovering however stress points like high
NPAs and higher interest rates still plague the economy
Jump starting the mining sector and increase in infrastructure
spending could stimulate growth
Political compulsions like the deferral of the Insurance Bill
could affect India's status as a favoured investment
destination
The year has been phenomenal for Indian equities. The
WisdomTree India Earnings ETF (EPI) which is a broad based
index tracking the Indian stock market is up 35% since January,
while small-cap ETF's like the Market Vectors India Small-Cap
Index ETF (SCIF) , EGShares India Small-Cap ETF (SCIN) and
the iShares MSCI India Small-cap Index ETF (SMIN) are all up
more than 50% . The median historical P/E for the NIFTY has
been around 18x , currently they are trading at 20x multiples.
So is there any steam left in the Indian juggernaut ? Can it still
reach another milestone by the year-end ? Will the NaMo
magic (Prime Minister Narendra Modi's magic ! ) transform
India's economy ?
Macros: Green shoots rising.....

2. In the Union budget for FY2014-15 the finance minister Mr.
Arun Jaitley, had estimated India's subsidy bill at $44bn or
2.03% of the gross domestic product. Oil subsidies account for
24% of the budget subsidy. This number was calculated
assuming crude prices to be around $110 per bbl. However
since then the Indian crude basket has fallen to $96.71/bbl (as
on Sept 17,2014). If the drop in price sustains itself it will
reduce oil under-recoveries thus improving the budget deficit
Similarly despite fears of drought and a deficit in rainfall. The
monsoon has been within normal limits for most parts of the
country. In fact in September it has recorded one of the
heaviest spells of this season, decreasing the overall monsoon
deficit to 11%.

3. Agriculture accounts for 46% of the total employment in the
country and a good monsoon augurs well for the sector and
results in a domino feel-good effect on the economy.
This feel-good effect is also evident in the quarterly consumer
confidence survey conducted by the RBI. After years of being
despondent the consumer finally feels optimistic about his
future under the BJP government
135
125
115
105
95
85
75
Current
Situation
Index
Future
Expectation
Index

4. But one of the leading sign of a recovering economy is the
growth in commercial vehicles sales. Industry figures show that
sales growth of CVs seem to have bottomed out.
Potential red flags
A big stress point in the economy is the rise in NPA's in the
banking sector. A large chunk of NPA's are owned by public
sector banks. Higher NPA's in PSU banks was historically due
to their large exposure to the agri & priority sector. However the
recent Supreme Court judgement for cancelling 214 coal block
licenses is likely to add to their woes. Out of the 214 blocks
only 46 blocks were active. The apex court has stipulated a fine
of $4.86/ton of coal that was mined from these blocks. The
State Bank of India, the largest PSU bank in India has a

5. $670mn exposure to the mining & power sector. Implications of
the decision, will likely be felt by the companies that own the
active blocks as well as by the banks that had provided them
funding based on the coal allocations.
Another risk to investments in India are high Interest rates. The
RBI Governor will announce its bi-monthly review of monetary
policies on Sept 30. Even though inflation seems to be under
control, the RBI is unlikely to reduce interest rates till the fourth
quarter of FY15.
Another risk is the political opportunism which can block key
reform initiatives by the new government. During the recent
Parliamentary session the government was unable to clear the
Insurance Bill. The bill was supposed to be one of the most
important reform initiative by the new government. Though the
government has a majority in the Lok Sabha, they do not have
the requisite numbers in the Rajya Sabha. The Congress-led
opposition blocked the Bill and it was referred to a
Parliamentary Standing committee. It's ironic, because before
the elections the Congress party was one of the staunchest
supporters of the bill. But after losing the elections it started
raising objarections to some amendments made by the BJP
government. Such political compulsions could spoil the love
affair that investors had with the new government!
Investment outlook vs competing economies

6. S&P recently upgraded the sovereign credit outlook from
'negative' to 'stable'. The upgrade was based on the decisive
mandate that Modi's government has received and on the
expectations that they would be able to push for far reaching
reforms which can put the country on a high growth trajectory.
This reiterates what the fund managers have been doing for
quite some time by investing in Indian stocks.
So how does the Indian economy compare with its peers -viz.
Brazil, China, Russia & South Africa ((BRIC's)) ?
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
-0.50%
-1.00%
Brazil
China
India
Russia
South Africa
Brazil seems to be in a recession with two consecutive quarters
of de-growth. While the Russian Federation continues to
pander to its imperialistic ambitions as NATO imposes
sanctions on the failing economy. Even though China has had
higher growth rates, the Sanghai Composite has been
underperforming the S&P NIFTY. Though the recent
September Flash PMI was above 50, it seems likely that their
years of high growth are over, and growth rates will fall to more
sustainable levels.

7. 135.00
130.00
125.00
120.00
115.00
110.00
105.00
100.00
95.00
90.00
Sanghai Composite
NIFTY
In contrast the Indian economy is on the path to recovery. Also
optimism regarding the new reform oriented government is very
high. We can expect a period of consolidation in the stock
market during the next few months before it resumes it move
up.