Indian markets began November on a good note with positive news flow related to improvements in ease-of-doing-business ranking and India’s rating upgrades. And as highlighted in last month’s newsletter (link) as well, both the markets and business communities welcomed the GST recalibration.

But eventually, the month ended on a more sober note. Both Sensex and Nifty closed down -0.2% and -1.1% respectively.

The overall YTD returns still stand at healthy 25% and 24% for Nifty and Sensex respectively.

Gujarat Election Results (announced mid-December)

As expected the run up to the outcome of Gujarat elections was a heated one with both BJP and opposition claiming a decisive victory.

At the time of updating this newsletter, BJP has emerged victorious is Gujarat (as well as Himachal Pradesh). But to be fair, it did get a wake-up call as the margin of victory was nowhere close to what the party believed. Congress under its newly crowned leader in Rahul Gandhi too came out with a strong showing.

This is big news from a political perspective as Gujarat has been under BJP’s rule for almost 2 decades and is PM’s home turf. Also, Gujarat has a large business community which has been impacted by demonetization first and GST later.

Therefore, the outcome of this election was expected to be a crucial one as it was a test for the popularity of the existing state government and BJP’s reformative steps. A negative outcome would have had a strong bearing on other states where elections are scheduled next year (like Karnataka, Rajasthan, Madhya Pradesh and Chhattisgarh) and also on 2019 Lok Sabha elections.

India’s Rating Upgrade & Ease of Doing Business

After almost 14 years, the rating agency Moody’s has upgraded India’s sovereign rating. The ratings have moved up a notch to Baa2 from Baa3 and the agency has changed the outlook on the rating to stable from positive.

This is a strong endorsement of government’s consistent approach of implementing politically-questionable but pro-economy reforms like Demonetization, GST, PSU Bank Recapitalization. With this, it is clear that world too recognizes the effort that is being put in pursuing structural reforms that focus on formalizing the economy, improving transparency and staying on the path of fiscal and monetary prudence.

Moody’s confirmed that its rating upgrade is driven by its assessment of government’s reformative steps and issued a statement that, “The decision to upgrade the ratings is underpinned by Moody’s expectation that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential.”

This upgrade is also likely to bring in a fresh round of foreign portfolio investments and make external commercial borrowings cheaper. Read more about the upgrade here.

It is worth noting that India’s GDP growth has also improved to 6.3% in the September quarter. This is up from a 3-year low of 5.7% in the June quarter which was attributed to the lingering effects of demonetization last year and GST rollout in this one.

India has also improved its ranking in World Bank’s Ease of Doing Business Index by 30 positions – the highest jump this year for any nation.

R&R View on Economy& Markets

With Gujarat too in its bag, the government can strengthen its ongoing reforms program which is slowly but surely improving the economy fundamentally.

Steps like Demonetization, GST, PSU Bank Recap Program, Highway infrastructure push, etc. are all strengthening the economy from the inside and not just cosmetically. Without doubts some section of the population will feel the pain because of these steps. But that is a small price to pay for putting India back on the highway of sustained multi-year, real structural growth. In this multi-year journey, the risks from global events, oil prices, etc. will be there. But when the economy is internally strong, it can take these shocks in its stride and continue its journey ahead.

Now with national elections just little over a year away, the government is expected to refocus on announcements which might have more immediate visibility and benefits unlike some of its previous reforms. So it will be interesting to see how next few months play out.

As investors ourselves and custodians of client’s wealth, we continue to focus on things we can control -Bottom-up understanding of the small universe of investible companies rather than focusing too much on gauge macroeconomic trends or government policies.

Also, when the focus is on fundamentally strong businesses, it doesn’t matter whether the environmental conditions are good or bad (read why?).

On that note, we end this newsletter and as always, appreciate you for taking time to read this message. Do share your views/comments by email/comment section below.

Regards
Team Equentis