The last two weeks have seen a vicious rotation in sectors and stocks in financial markets. Winners for the past 2-3 months have been taken down hard and money has rotated to sectors that were trashed in January & February. Darlings like Facebook, Netflix, biotech stocks have been pummeled and gold has been beaten so badly that it looks like brass. Investors have been taking profits wherever they had them and running to deeply oversold markets.
So you would have expected investors take their profits and run from the Indian stock market, a winner since August 2013. They have not. Instead, they seem to be doubling down their bets. As a result, the Indian stock market reached another all-time high well above 22,000 and the Indian Rupee breached through the 60 level, something very few expected in the sell off to 67-68 in August 2013. And Wisdomtree’s EPI, the largest India ETF on the NYSE, closed at 19.02, a 45% rally from its level on August 28, 2013.
Just look at the number of upgrades of India this week:
- Cumberland Advisors, a respected investment firm, announced on Tuesday March 25 that they were “Upgrading India”.
- Famous economist David Rosenberg of Gluskin Sheff – Long India, Short Russia – “India is out of a prolonged recession and is into a full-fledged recovery and is likely facing pro-growth political change. So go long companies that are exposed to India and short industries that have high export orientation to Russia”
- Wisdom Tree, a well known & large ETF provider, published a piece calling India a “Bright Spot for Emerging Markets” and argued that India presents an interesting opportunity.
After a 45% rally in their own EPI fund, WisdomTree thinks India is an attractive entry opportunity? Don’t investors make money by taking huge profits and then going somewhere which is much cheaper?
Yes and No. The answer is Yes when the rally has been technical or simply based on attractive valuation. But No if the rally has been due to a major change, a secular change in the country’s fundamentals.
Those who are upgrading India now or those have remained bullish on India since August 2013 think a major secular change may be unfolding in India. Read the following exchange between the normally bearish & usually snide Jim Grant and CNBC’s Kelly Evans:
- Evans – “for people who missed out on the investment opportunity that the Reagan revolution, Thatcher in Great Britain, even the German post-World War II economic miracle represented, you think India could be that next great investment?”
- Grant – “I think it could be. I think the world is always looking for the next growth story and I would nominate India. India has been in thrall to statism under every guise, Socialism, Gandhism, Nehruism. Narendra Modi, a.k.a. NaMo, has vowed to put his vast, poor and comprehensively mismanaged country on the road to modernity. Now under way is a financial travelogue whose terminus is optimism. China is yesterday’s growth story, India might be tomorrow’s.”
The “NaMo” Wave
A couple of months ago, a savvy friend in India suggested to us that the “NaMo wave” may actually be a case of India finding and shaping Narendra Modi than Mr. Modi leading India. NaMo is the only leader in India who has actually delivered development to his people. As a result, people all over India are saying that they want what Gujarat has done and they are looking to Mr. Modi to deliver it.
This is what comes across in the “Generational Shift” article by Amy Kazmin in the London-based Financial Times. The article has been written after interviews “with scores of young people, many from humble, rural backgrounds, at government and private colleges” –
- Anil Kumar Bahe, 25 from a remote village in Madhya Pradesh – “But rather than being given money and handouts, people should be given opportunities”
- “We want good education, better jobs and a good life,” says 18-year-old Jay Ramteke, a farmer’s son who is studying geology at the government university in the Hindi heartland town of Sagar. “Everybody is talking about Narendra Modi. Now we have to see: can he deliver?”
- “Congress has not done anything – the only thing they’ve done is promote corruption,” says Ranjit Singh, 21, a commerce student, whose father is an army contractor. “Our only hope is Narendra Modi. If he comes as prime minister, development will take place.”
This is the NaMo wave, a wave that Mr. Modi understood and is now riding.
On the other hand, another smart friend pointed out that very few of the people who seem to want what Modi has done in Gujarat have ever visited Gujarat. So they are essentially buying a “tale” of Gujarat, according to him. His skepticism misses a critically important point about how nations turn around and become successful.
“Tale Risk” or Power of a Narrative
The concept of “tail risk” is popular in macro thinking, a term that comes from statistics. It signifies risks that do not occur often but cause huge damage when they do.
Robert Shiller, this year’s winner of the Nobel Prize in Economics, has cleverly coined a similar term “Tale risk”, a risk that doesn’t occur often but can result in great upside when the tale inspires people. In other words, “tales” or narratives that change the confidence of a nation are just as rare and powerful as “tail” risks. Robert Shiller wrote last week about such “Tale” risks:
- “Fluctuations in the world’s economies are largely due to the stories we hear and tell about them. Since Prime Minister Shinzo Abe assumed office in December 2012 and launched his program of monetary and fiscal stimulus and structural reform, the impact on Japanese confidence has been profound. According to the International Monetary Fund, the output gap – the difference between actual and potential GDP – narrowed from -3.6% in 2011 to -0.9% in 2013.”
Shiller explains why Abe’s narrative changed Japan:
- “He [Abe] sticks to the script, telling a story of taking aggressive and definitive action against an economic malaise that has plagued Japan for decades. He inspires confidence; I felt it immediately.”
- “Abe is also described as reviving national patriotism, even nationalism. … I think it may be a central part of his story, too. Nationalism, after all, is intrinsically bound up with individual identity. It creates a story for each member of the nation, a story about what he or she can do as part of a successful country.”
Shiller has neither met NaMo nor has he heard NaMo speak, at least to our knowledge. Mr. Modi inspires confidence; you feel it immediately. He has delivered development in Gujarat. And he is reviving patriotic nationalism. That is what young Indians told Financial Times and that is what we heard from people in Mumbai.
There is a deep yearning in Indians to succeed, to be a part of a successful India. The campaign of Narendra Modi, the son of tea-seller from one of the lowest social segments in India, embodies this yearning. And people all over India are saying do for us what you did in Gujarat. That is the power of a “Tale”.
Remember Ronald Reagan? He was widely derided as a non-intellectual and often called stupid. During his first presidential election, all Reagan offered to the rest of America was a “tale”, a tale of a new morning in America. His “tale” inspired confidence in a country mismanaged for the prior decade and hurting. Reagan radiated hope, optimism and patriotism. He was a core American. Margaret Thatcher was British to the core. She was called and is still called a racist by some.
Narendra Modi is core Indian, deeply rooted in Indian culture & Dharma. He wants to make India great again, a beacon for the world that it once was. He is derided by the “English-educated” Indian elite just as Reagan was derided by the American elite. But this elite contempt simply enhances the NaMo tale just as it enhanced the Reagan tale.
India as a Secular Growth Opportunity
We are and have been secular bulls on the Indian micro story, the story of how Indian entrepreneurs build & succeed in spite of a horribly anti-business central government. This is what every investor knows and what stunned Chinese strategist Jerry Lou when he first visited India in January 2007. He wrote then that Chinese companies often succeed because of the Chinese Government while Indian companies have to succeed despite the Indian Government.
Narendra Modi can change the Indian macro story. He represents credible hope for an Indian Government that works for Indian development than against it. He represents credible hope for Indians and for global investors who are looking for the next secular, long term opportunity.
This is what Jim Grant seems to be saying with his comparisons to the Reagan revolution in America and the Thatcher period in Britain. There is tremendous interest in making long term direct investments in India both from Indian Industry as well as global investors. They are waiting patiently to see whether Mr. Modi wins the election and wins with enough votes to build a strong government.
The election begins in 10 days and the results are due in mid-May. The polls are suggesting a victory for Mr. Modi. That is why we are beginning to see global investors upgrade India.
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