Where is the Modi miracle in Indian equity earnings?

India’s leading equity index reached an all-time high in June, following the landslide election victory by Prime Minister Modi’s ruling Bharatiya Janata party (BJP).

We would agree with the market consensus that the BJP has stronger economic credentials than its rival, the Indian National Congress. However, we believe it is important to note that Modi’s party appears to have had no discernible impact on corporate earnings so far.

The earnings per share (EPS) of India’s leading equity index grew by only 4% a year from 2013 to 2018, a period encompassing the first term of Modi’s government. Given inflation in India has hovered around 4% through this period, such a performance is nothing to write home about.

Yet India’s equity market has performed well since Modi took power, rising by an average of 13% per year since 2013. This has been driven by multiple expansion, with the price-to-earnings ratio for the index rising from 15 pre-Modi to 23 in 2018. So although earnings growth has been muted to date, investors appear to be increasingly convinced of an acceleration ahead.

We recognise that the ruling government has a strong mandate from the people, but the key question is whether the reform agenda in the BJP’s second term will advance faster than in its first term. There is debate on this topic within LGIM. Within the Asian Income team, we are perhaps less confident than the market, while our colleagues in Asset Allocation are more constructive. However, we would all agree that at today’s elevated multiples, the equity market may perform poorly if investors lose patience with the pace of reform.