The Indian stock market has been experiencing a gigantic rally over the last couple of months as it became clear that Indian nationalist Narendra Modi would become prime minister of the country. Well, the man just won the elections and reached single-party absolute majority in the parliament: 282 seats out of 543 total seats. Why are investors so excited about the new government, though?
Have a look at the year-to-date performance of the Direxion Daily India Bull 3X Shares (NYSEMKT:INDL) ETF, which seeks to amplify the performance of the benchmark Indus India Index by a multiple of three:
There are several reasons for the optimism. First, Modi is a strong supporter of growth and development -- and India needs plenty of both. New infrastructure investments should increase aggregate demand and drive businesses ahead. Second, the fact that Modi's party won by a landslide -- the biggest margin in 30 years -- will give him enough power to get things done. This may finally end the political paralysis that India has experienced in the past few years, which owes to the country's coalition politics. Regional parties have often blocked reform measures in an effort to serve their own narrow interests and agendas, but the path to change is now clear.
Analysts expect that the political reforms Modi will carry out could involve a fiscal belt-tightening, a reduction in corruption and bureaucracy, and lower inflation. This would improve the domestic business climate and boost investments. In fact, Morgan Stanley forecasts GDP growth to accelerate over the next eight quarters to 6.8%, with inflation heading toward a healthy 6% over the next two years.
Will Tata Motors grow?
This new period in India should definitely have an impact on one of its most emblematic companies, Tata Motors (NYSE:TTM). This industrial giant not only manufactures vehicles, but also operates in sectors that encompass steel and energy. Higher infrastructure spending and development levels should raise Tata's sales.
Analyzing the third-quarter results, the biggest growth-driver for Tata has been its Jaguar Land Rover brands, which the company acquired from Ford in 2008. Jaguar remained the star, with retail volume growing 59% from Q3 2013 to Q3 2014, while Land Rover managed to grow a still-impressive 22%. China is Tata's biggest single market, now accounting for 25.6% of volume after the region's volume skyrocketed 46% year over year to lead all regions in growth.
Domestic sales of Tata-branded vehicles dropped 36%, however. According to the company itself, the prolonged slowdown in economic activity and subdued infrastructure activity are responsible for the weaker sales. The turnaround in Indian politics could reverse this trend and finally unlock domestic growth potential.
When it comes to investing in India, demographics are a key consideration. It is the second-most populous country in the world, and in the next 10 years it is set to deliver a quarter of the world's working-age population growth. The demand potential is tremendous.
Considering that international sales are showing good momentum, investors could be betting on future improvements in Tata's domestic market. Tata holds a 55.8% market share of commercial vehicles in the country and could easily profit from better market conditions. Let's not forget that India lags significantly compared to other big emerging markets in regard to the pace of urbanization and infrastructure growth. There's a lot to do, and if things get going as the new government promises, then Tata should feel it.
Turning back to macroeconomics, India has deficits all over the place: It has a GDP deficit of 4.6%, a large current account deficit, a heavy $200 billion-per-year trade deficit, and rapidly declining economic growth. With this in mind, it's likely that India will go through a lot of pain correcting these imbalances before we see major improvements in domestic aggregate demand that could improve vehicle sales. Similar reasoning can be applied to most India-related ETFs like Direxion Daily India Bull 3X: If the country does not keep up with expectations, we might see a correction ahead.
Louie Grint has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.