A market skeptic asked me after the results; why are markets so excited about Modi? He had a point. During the last 5 years, the Nifty gave an average return of around 9.5%, which is lower than the 11.5% CAGR that the Nifty returned since inception. Let us look at five key reasons why the markets are excited about Modi 2.0.
Look at wealth creation
You will be surprised to know but the stock markets created $1 trillion of wealth during the 5 years of the Modi government. This is highest absolute wealth created by stock markets in any 5 year rule in Indian history. While the index may not have performed that well, the real action came in the form of new listings and non-index stocks. That is a lot of wealth created in 5 years.
Financialization of savings
No previous government contributed as much to financialization of savings and building the indirect equity cult as the Modi government. AUM of Indian mutual funds moved up from Rs.8 trillion in 2014 to Rs.23 trillion in 2019. Such a huge growth on a large base is truly commendable. Also, the Indian mutual funds collect nearly Rs.8500 crore each month through SIPs, which is largely stable. Also mutual fund folios and demat accounts have seen a manifold increase. That is the kind of retail push that markets always wanted!
Continuation of reforms process
One thing Modi 2.0 assures the market is of a continuation of the reforms process. Some of the reforms like GST and IBC have been substantially value accretive for a lot of stocks in India. Modi 2.0 also means that the reforms momentum will continue at the same pace. In the previous regime, Modi has shown a penchant to take up bold reforms like IBC and GST and even out of the box reforms like the cash ban. That is the approach markets look for.
A divestment boost
The market expects that the decisive mandate for the Modi government for a second term will coax the government to be more aggressive in divesting government stakes. Strategic sale was spoken about but not pushed through. This will only mean more quality paper coming into the stock markets thus reducing the bubble risk.
FPIs like it; that is important
FPI have driven the direction of Indian markets for the last 25 years and they are truly happy about the return of the Modi government. That only assures that flows into India will continue at a rapid pace in the months to come giving the markets the much needed stability and support. If you are wondering why the markets rallied post exit poll; this was one of the key reasons! ©