In this briefing:
- 2019 Elections – Part 3. India: Modi’s Magic Touch Fades as Populism Re-Appears
- India: Monetary Policy Review – One More Rate Cut Likely
- Screening the Silkroad: Small-Mid Cap – Possible High-Risk Names: Q1 2019
1. 2019 Elections – Part 3. India: Modi’s Magic Touch Fades as Populism Re-Appears
The world’s largest democracy holds general elections over a six-week period in April-May. The ‘Modi magic’ of five years ago has long faded as growth failed to meet expectations. Poor results in recent state assembly elections signal something of a ‘Congress comeback’, which raises the risk of a hung parliament and a prolonged period of political uncertainty. The close race has spurred Modi’s BJP to backtrack on fiscal consolidation and instead pivot towards populist policies (like farm loan waivers) that may fan inflation, reignite ‘twin deficit’ concerns and reverse India’s ratings upgrades. Risk assets are likely to see more volatility, with risks tilted to the downside.
This insight is Part 3 of a six-part series on 2019 elections in which we evaluate key polls and their potential to re-shape the economic outlook and investment risk profiles. These six markets – Thailand, Indonesia, India, South Africa, Greece and Argentina – collectively represent one-quarter of the world’s population and more than $5 trillion in GDP. We review distinct domestic challenges as well as campaign pledges by incumbents (and their challengers) aimed at addressing them. We also humbly assign probabilities to baseline and alternative scenarios and their implications for macroeconomic outlook and investments.
Even amidst their diversity, these six jurisdictions display some remarkable similarities: subdued economic momentum, bouts of market volatility, signs of voter disquiet and/or disillusionment and an opposition looking to capitalize on all of these forces. In a bid to revive the ‘magic’ that had helped to install their administrations, many incumbent governments are now on the defence – either changing tack (and dialing back past policies) or attempting to convince voters to let their policies work their magic.
Summary – Election timeline, political risk classification and market implications:
Election date (2019) | Degree of uncertainty | Baseline scenario (%) | Market implications | Market view | |
Thailand | 24 March | Medium to High | Elections are held and pro-junta PP keeps control (65%) | Medium to Low | THB: Stable unless political uncertainty erodes confidence, tourism ThaiGB: Stable CDS: Gradually wider SET: Energy, materials and capital goods favoured. More upside in non-bank financials vs financials. |
Indonesia | 17 April | Low | Jokowi re-elected, PDIP coalition intact (75%) | Medium | IDR/IndoGB: Constructive INDON: Stable JCI: prefer energy, materials, services, capital goods, transportation,and telco.Cautious on main banks. |
India | April to May | High | BJP/NDA retain power, with smaller majority (60%) | High | INR/IGB: Steeper curve (bearish long-end) CDS: Wider on potential negative sovereign outlook Nifty: Cautious healthcare and banks. Overweight IT. |
South Africa | 7-31 May | Medium to High | ANC retains power (80%) | High | ZAR/SAGB: Constructive SOAF: Constructive JSE Top40: Constructive on Financials. Cautious on consumer. |
Greece | 20 October | Medium to High | ND returns to power (52%) | Medium to High | GGBs/CDS: Scope to tighten vs periphery peers AEX: Banks may revive though European credit markets need to be watched. Energy, Infra, and utilities offer opportunity. Gaming too. |
Argentina | 27 October | High | Cambiemos retains power (52%) | High | ARS/Argtes: Peso richly valued but slower inflation positive for Argtes ARGENT: Volatile Merval: Volatile. Optically cheap valuations signify risk and weak growth. Hydrocarbons could be a winner. Cautious on consumer. |
Historical 5yr CDS (Argentina and Greece = LHS, all others RHS):
Historical equity indices (rebased where 1 Jan-2018 = 100):
Please refer to other insights in this series:
- Elections 2019 – Part 1. Thailand: Magic Moment for Democracy’s Return?
- Elections 2019 – Part 2. Indonesia: Jokowi’s Policies – Magic Bullet or Bitter Pill?
- Elections 2019 – Part 3. India: Modi’s Magic Touch Fades as Populism Makes a Comeback
- Elections 2019 – Part 4. South Africa: Ramaphosa – ANC’s Magician?
- Elections 2019 – Part 5. Greece: New Democracy Promises Magic Makeover
- Elections 2019 – Part 6. Argentina: Macri Magic and the Peronist Spell
This series is co-authored by Paul Hollingworth at Creative Portfolios and Virgil Fernandez Esguerra.
2. India: Monetary Policy Review – One More Rate Cut Likely
At the first monetary policy meeting of the new RBI Governor, the MPC reduced the policy rate by 25bps to 6.25% and changed the stance of monetary policy to ‘neutral’ from ‘calibrated tightening’. Both were as expected by analysts and the markets. The MPC also significantly lowered its inflation projection and it now expects headline CPI inflation to remain below 4% for the foreseeable future. This new revised forecast, implies that there is space for one more rate cut. I expect the MPC to use this space in its April policy review before going on pause for the subsequent few policy reviews. Today’s rate cut does not, by itself, suggest that the new Governor will be unduly dovish. That said, given the slightly surprising voting pattern, the minutes of the policy meeting (to be released after two weeks) will provide a bit more color on the changed dynamics in the MPC.
3. Screening the Silkroad: Small-Mid Cap – Possible High-Risk Names: Q1 2019
Increasing risk apparent
- Q4-2018 Small-Mid Cap High-Risk screen ( Screening the Silkroad: Small-Mid Cap – High-Risk Names To Avoid Q4 2018 ) delivered a market cap average share price decline of 4.5%. This compares with the MSCI Asia Pacific Index appreciating 4.2% over the same period.
- Our screen looks for high valuation multiples presented by candidates, with significant earnings growth forecasts, as well as financial indicators that suggest balance sheet distress.
- The Risk to this screen: The Financial and Utility sectors are not covered in this screen. Moreover, “risk is not a number, it is a concept or notion”, as James Mortiner cited during his time at Société Genéralé. Hence, some stocks due to their business model being realigned to a more profitable approach may appear on this screen, whilst also be a member of more positive value or quality screens.
- 26-stocks appear in our Q1 2019 screen. Eight (8) of which are new, namely from Korea, Japan and Taiwan. Singapore remains absent from the screen for the third quarter running, whilst New Zealand has only presented one candidate in Q4 2018.
Our screen suggests that risk is increasing amongst the small-mid cap universe, as the Alman Z average score slips to 1.14 in Q1 2019 from 1.16 in Q4 2018 and 1.38 in Q3 2018. Moreover, our average stock in the list has a ranking of 42.3, compared to 54.9 in Q4 2019.
Our screening styles
For those that follow us, you will know our Stock Ranking system from our Notes from the Silk Road: Setting Out Our Small-Mid Cap Lemonade Stand For newcomers to our notes, it is merely a tool for identifying favourable and unfavourable stocks. In addition, to add more depth to our selection process we also monitor a series of “style categories” namely:
■ Growth,
■ Value,
■ Quality,
■ Momentum,
■ Deep Value,
■ Income,
■ Underperformance.
Within these style categories, we drill down further through a series of alpha momentum screens allowing us to differentiate and identify stock picks.
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