|The S&P BSE Sensex Index, which surged 36 percent this year through November on Prime Minister Modi’s landslide election victory, has since dropped 4.2 percent, capping its biggest monthly retreat since February 2013. Shares that benefit most during economic expansions, including industrial and raw-materials companies, have turned from market leaders into laggards since he took office in May.
Equity investors are paring expectations for a revival in Asia’s third-largest economy as opposition politicians hamper the prime minister’s ability to push through measures designed to attract foreign capital. Analysts cut fiscal 2016 earnings forecasts for Sensex companies by the most in four months in December, while foreign investors are pulling out of the $1.5 trillion market at the fastest pace since Modi won the Bharatiya Janata Party’s nomination in September 2013.
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“I am a bit nervous about the fact that the momentum of reforms is not continuing at the moment,” Andrew Holland, the Mumbai-based chief executive officer at Ambit Investment Advisors Pvt., an Indian joint venture with Japan’s Nikko Asset Management, said in an e-mail on Dec. 24. “That is my big concern for India.”
Opposition from India’s Congress Party disrupted parliament for more than a week over demands that Modi address a plan by the Rashtriya Swayamsevak Sangh, a BJP-linked Hindu group, to convert more than 2,000 Muslims and Christians on Christmas day. That derailed plans by the BJP, which has a majority in the lower house but controls just 18 percent of the upper house, to pass measures that would permit more foreign investment in the insurance industry and make coal mining more transparent.
Modi resorted to temporary executive orders this month to push through the changes, which still need parliamentary approval to come into force permanently, according to PRS Legislative Research, a New Delhi-based group that tracks India’s parliament.
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“The government will have to find a way to bring the opposition parties on board to carry out legislative reforms and create a more conducive environment for growth without the policy uncertainty,” Sonal Varma, a Mumbai-based analyst at Nomura Holdings Inc., wrote in a report on Dec. 29.
At stake is Modi’s ability to convince businesses to increase spending on the long-term investments needed to boost economic growth in the country of 1.2 billion people. India’s gross domestic product expansion slowed to 5.3 percent in the three months ended September from 5.7 percent in the previous quarter, while factory output unexpectedly fell the most in three years in October.
“The talk has changed a little bit to whether this is truly a reformist government,” Madhav Dhar, a Delhi-based managing partner at GTI Capital Group, an India-focused investment firm, said in an interview with Bloomberg TV India on Dec. 29.
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While the pace of reform in India may disappoint some investors, the government is on the right path and the outlook for the stock market is still positive, according to Navneet Munot, the chief investment officer at SBI Funds Management Pvt. in Mumbai, which oversees $11.6 billion.
The Sensex rose 0.4 percent to 27,499.42 at the close in Mumbai, taking this year’s gains to 30 percent, the most since 2009.
Morgan Stanley strategists raised their Sensex target on Dec. 1, predicting an 18 percent rally from today’s level by the end of 2015. Credit Suisse Group AG said Dec. 10 it sees the gauge climbing 30 percent over the next two years. Even after this month’s retreat, the Sensex is the best-performing benchmark index (SENSEX) among the world’s 20 biggest markets after China, outperforming the MSCI BRIC Index of the four largest emerging countries by about 36 percentage points.
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“One can argue about the pace of reforms, but the overall direction and the government’s intention are right,” Munot said in an interview with Bloomberg TV India on Dec. 26.
The change in leadership among India’s industry groups suggests investors are ratcheting down projections for an imminent economic revival. The MSCI India Industrials Index, which led gains among 10 industries with a 44 percent rally from the end of last year through May 26, when Modi took office, has since dropped 1 percent. A gauge of materials companies has lost 5 percent, paring this year’s gain to 15 percent.
Health-care and technology companies that are less reliant on India’s domestic economy, including Sun Pharmaceutical Industries Ltd. and Infosys Ltd. (INFO), have led gains since Modi was sworn in, with gauges for the industries rising 45 percent and 22 percent, respectively.
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“Policy implementation is more gradual than expected,” Tai Hui, the Hong Kong-based chief Asia market strategist at JPMorgan Asset Management, which oversees about $1.7 trillion, said in a Dec. 25 e-mail.
Analysts have cut Sensex earnings growth projections for the year ending in March 2016 by 1 percent from this year’s high on Nov. 3, after a 22 percent increase from the beginning of the year, according to data compiled by Bloomberg. Foreign investors sold a net $249 million of Indian shares in December, paring this year’s inflows to $16 billion.
Concern over the pace of reform in India may leave the stock market vulnerable to further declines next month, said Holland. The Sensex has dropped an average 1.7 percent in January during the past 12 years, the worst performance of any month, data compiled by Bloomberg show.
“In a global selloff, which you could easily see in January, India will not have any buffer left,” Holland said.
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