The Modi Premium
Last week, I was chatting with a retired banker who has his savings invested largely in stocks. Like many thoughtful people hoping to see a just and equitable society, he was concerned about “what’s going on in the country”. He wants a change for the better. Then, he hastened to add with a tinge of alarm, “Of course if Modi does not come back to power, I am sure 20% of my portfolio will be wiped out.”
The Indian stock market is carrying, what can be called, a Modi premium. Last Friday, the market jumped to an all-time high on the news of higher growth rate of the gross domestic product (GDP) and several opinion polls favouring a return of the Bhartiya Janata Party (BJP) government in Madhya Pradesh and a close contest in Rajasthan. Then, on Sunday, when the BJP did even better than expected, winning back Rajasthan and Chattisgarh from Congress and retaining MP, the market went euphoric.
Our retired banker is not alone in acknowledging the Modi premium. In the absence of clear alternative leaders, the same thought would perhaps, dominate the minds of millions of people, whether or not they support the current regime.
Over the last few years, tens of millions of new investors have entered the capital market. In September alone, more than 3mn (million) new demat accounts were opened, the same number as in August. Cumulatively, India has more than 130mn demat accounts now, with 2mn-3mn accounts added every month.
This wildfire growth has been a result of a fortuitous set of factors such as the ease of opening accounts, record-breaking initial public offerings (IPOs), aggressive account acquisition campaigns by brokerage firms, the impact of social media and the extremely strong performance of small and mid-cap stocks over the last three years. As a result, the total demat account in India jumped from 40mn at the end of FY19-20 to 130mn at present.
Imagine the enormous implications of these numbers. Compulsory dematerialisation was introduced in 1996. Over the next 24 years, the number of demat accounts went up to 40mn. Then, in just three and half years, that figure jumped by more than 3.2 times to 130mn. This means that 90mn new investors, 2.5 times the total demat population developed over 24 years, have entered the market in just the last three years or so.
They have only known a bull market, one that has constantly climbed over a wall of worries such as a pandemic, high inflation, high oil prices and global disruptions including the Russia-Ukraine war, high US interest rates, the Israel-Hamas war and a global slowdown in trade.
Not only have these 90mn newbie investors never faced a crushing bear market, they have no memory or understanding of economic and market cycles. Most are young investors, who view market dips as buying opportunities. They have no idea that periodically, sometimes for many years at a stretch, the main stock market indices give you almost no returns.
During such times, small-cap stocks, which are the main beneficiaries of the current bull market, can get decimated. Remember, from January 2018 to August 2019 – under the same Modi regime -- Nifty small cap index was down 40%. It will happen again, especially when everyone is used to the maxim that “the market always goes up.”
Such sharp dips and crests used to happen fairly regularly in the past, but the general assumption today is that India has changed fundamentally. We are on an uninterrupted growth track, fuelled by higher government revenues, which are funding investment in urban infrastructure, railway modernisation and a large defence budget, all of which is helping local companies.
On the other side, the youth has more money to invest, and is attracted to the stock market.
A combination of economic growth, larger household and corporate surpluses, and a new attitude to risk-taking by investors, makes for a long-term bull market. Interestingly, while GDP growth of 7.6% in the second quarter is being celebrated, sales growth for the Nifty500 companies was just 3.5%.
According to our research, the current euphoria over small-cap stocks and IPOs leaves no room for error; most small companies are now being quoted at their historically peak valuations. Valuations matter for future returns. Returns are low when valuations are high.
Then, there is the Modi premium. To put it differently, some attribute our economic growth and the consequent bull market entirely to him. While our banker friend is worried about “compromised courts, one-sided media coverage, rising intolerance, lies spread through social media and the brutal state power unleashed on the selected few” and would like this to change, it will only be possible with a regime change.
But will a new regime deliver higher economic growth? There is no such indication because most opposition leaders never talk about economics or policy, it is only about subsidies. We have forgotten that the United Progressive Alliance (UPA) was voted out because of policy paralysis and corruption. We don’t know if the ordinary voter, who has not seen the same benefits as investors, will think like our banker friend.
And then there is also another possibility: economic growth, which we are taking for granted, slows down for a completely different set of local or global factors and the Modi premium vanishes. After all, there was no growth worth talking about between 2014-2020. As of now though, the Modi premium has been reinforced and very strongly indeed.
(This article first appeared in Business Standard newspaper)
2 months ago
Excellent article. Say I have most of my investment in equity, do you think I will trust the opposition block of today, to take my investments northwards, or the present "regime"? Won't I vote likewise? The greatest danger I see is the lack of a sensible opposition. Just see how they behaved in the last parliament session. Sweeping changes were made in the criminal laws, with a single debate, while the opposition was busy doing stand-up comedy outside the Parliament and one of the "leader" making memes recording on his mobile!
Pragna Mankodi
3 months ago
You are an experienced journalist on stock markets. It\'s not that the investors are betting on \"Modi Premium\". They are putting their faith in the stability of the government headed by Modi and the govt\'s economic policies and the consistencies of these policies. The voters and the investors have come of age and they have become smarter than we can think.
3 months ago
Any one who would like to invest after 70years of age should not look at volatile stock markets or trading on the wind ut go for safe investment with minimum assured returns.
3 months ago
Many people fail to understand that markets functions on trade-offs. Given a set of options, which is the best outcome? Please don't conflate what market "thinks" and what investors "want" (i.e. 12% GDP growth or whatever tickles investors these days).

If an investor feels the current government is not good enough, he/she is free to invest elsewhere or start a new party for ...errr..."regime change". We live in a free country. It's not Saudi Arabia or China.

If your banker friend wants to fantasise utopia where everything is "just" and "fair" and everyone has identical morals, then all the best. One can write a book whining on the state of the country, because even in a "perfect world" there will be something to nitpick on.

Why aren't unhappy Indians not moving to Europe or America where so called "morals" are "better" than India? or are they? I was told that one will be beaten up in America for misgendering but will be spared for supporting Hamas. At least they will be safe in Harvard. I'm not making this up.

This being said, I agree with the valuations part. Seems very high but what do I know about the future? The best way to approach this is allocate assets wisely and put something in gold. And build a bunker, just in case. And stock up some essentials.

Private markets seem largely insulated from crazy valuations though, and it's never been a better time to start a business or service or even a side hustle that might become big one day. The sheer entrepreneurial talent in this country is astounding. And a lot has improved since 2014 (except SEBI).
Kamal Garg
Replied to adityag comment 3 months ago
Nicely articulated comment - just keep on. People comment about America since they do not know the real hard truths of american life, liberty, justice, lobbying and of course human rights/discrimination. America is still to elect a woman as head of the State (even after roughly more than 250 years of freedom), leave aside many such things.
3 months ago
Stock market is e "real jungle" where one could be suddenly exposed to "financial beasts" and there's no "grievance redressal" just like a real life jungle.
Indian stocks " do not go up or down based on company fundamentals, so study of financial statements may not be able to guide new investor".
Real life facts like "no jobs" , youth chasing "billionaire dreams" , incessant ads " do SIP in MF" all guarantee ONLY ONE SURETY,namely "Shylocks will Take their pound of flesh" which one must understand.
3 months ago
Agreed 100%. There is zero evidence of higher economic growth or market returns under modi. Yet people think he is good for the markets. The returns under his 10 years have been the worst ever in Indian history for any 10 year window- even though the crude prices have tanked massively during this time. National debt has gone through the roof on wasteful expenditures. People are crediting 7.6% GDP growth to him while overlooking the fact that the combined deficit has reached 9%+. If the deficit is brought under control, GDP growth will be closer to 3.5%. But no one cares. Religion and stupidity have trumped common sense.
Kamal Garg
3 months ago
Cassandras should stop doomsday prophecies. Just enjoy and carry on the life till the Sun shines.
3 months ago
3 months ago
In 2004 when UPA upset the Vajpayee Government in Elections, there was a very similar knee jerk reaction in the markets on Monday when it fell by 800 points conveniently forgetting that the Architects of the 1990 liberalisation were Dr. Manmohan Singh and dream budgets had been delivered by FM Chidambaram. These stalwarts understood economics whereas the incompetent BJP Ministers including the semi literate Modi and his chief henchman Shah have no clue about economics. This is what happens in a democracy : if the majority are idiots, then only idiots will be elected.
Replied to shaidermota comment 3 months ago
You are correct
3 months ago
> compromised courts, one-sided media coverage, rising intolerance, lies spread through social media and the brutal state power unleashed on the selected few”

It is surprising that Indians are willing to give up their freedom in return of next-to-nothing. "Andher nagari, chaupat raja" is being manifested most in the northern states.
3 months ago
PM Modi is appeasing Muslims and Christians at the cost of Hindus. BJP has to be defeated in 2024 if Hindus wish a good future for their coming generations.
3 months ago
compromised courts, one-sided media coverage, rising intolerance, lies spread through social media and the brutal state power unleashed on the selected few”

Only the author and his "banker friends" bring up rehashed rubbish.May their tribe be rendered permanently irrelevant and their views consigned to the dustbin.
Replied to manojs comment 3 months ago
I agree with the original author.
Replied to manojs comment 3 months ago
I agree with the author.
Replied to manojs comment 3 months ago
So bang on target! The leftists and stupids like this author need a reality check ! Jokers all!!
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