Nifty scaled new high on hopes of political & policy stability

·         RIL, HDFC, and ICICI bank helped; Nifty was also boosted by hopes of a blockbuster budget including personal tax (SD) cuts and infra, disinvestments thrust

·         Looking ahead, PM Modi may face immense pressure from key allies like TDP, and JDU for huge infra grants, which may open Pandora’s box for other states and destabilize India’s fiscal math

·         Modi also has to face key state elections from late 2024 to 2025; if the incumbent BJP fails to win in MH, HR, and BR, then Modi may have to take a graceful exit from active electoral politics by Dec’25 on 75 years of age retirement (Marg Darshan) policy in BJP and Gadkari may be appointed as next BJP/NDA PM

India’s benchmark stock index, Nifty (INDIA 50 CFD) closed around 24292.45 Tuesday, surged +0.70% on the boost of private banks led by HDFC after an analyst upgrade and it becomes clear that RBI may not be in a hurry to cut rates, at least before Dec’24 (in line with Fed); usually higher rates is positive for Bank’s NIM (Lending Business model). Additionally, HDFC Bank was under stress for the last few quarters on various regulatory issues including FPIs selling and also the concern of subdued report cards.

But HDFC Bank is now boosting Nifty/Bank Nifty on hopes of a blockbuster report card in Q1FY25, analyst upgrade (target price INR 1900-2000; recent low around INR 1400; CMP around INR 1800), and inclusion/higher weightage in MSCI Index (Aug’24). RIL also helped in the last few days significantly on JIO optimism amid an increase of telecom/data/mobile/voice tariffs; other telecom companies like Bharti Airtel and Vodafone-Idea also followed.

Also, India’s inclusion in the JPM global bond index buoyed the risk trade sentiment. But growing issues about Hindenburg-SEBI-Adani are also exposing corporate India’s crony capitalism and governance issues/political corruption.

Overall, Nifty surged almost +6.57% in June’24 and closed around 24010.60 after a roller coaster move on India’s election result days. Nifty soared by almost +800 points to 23338.70 after the exit poll (3rd June) but plunged by almost -1950 points the next day (4th June) after the ‘exact’ poll (in sharp contrast). Official (?) exit poll by India’s Sarkari Godi media (mainstream TV networks-government/Modi savvy) predicted a blockbuster win for Modi (BJP/NDA) with 350-400 seats, but eventually exact poll gave BJP/NDA 292 seats (240+52), in line with unofficial Social Media projections (by experienced political journalists/analysts).

In this way, Nifty eventually recovered to 23000 pre-election levels after it became clear that it would be Modi 3.0 as the opposition alliance IND (led by INC/Gandhi) is not in a position to form the government with 241 seats (INC 100 seats). But there was some concern about the political stability of Modi 3.0 amid not only contextual allies (TDP/JDU etc) but also widespread/increasing dissatisfaction in BJP/RSS for Modi’s dictator-like attitude with totalitarian behavior.

Eventually, PM Modi was able to form his 3rd government with the continuation of his 2nd term (almost all important ministers/ministries were unchanged without surrendering to key allies) including the important post of LS Speaker, who may support any ‘Operation Lotus’ by team Modi in future so that BJP/Modi can have additional 35-50 MPs from other parties (mainly weak allies like JDU) and BJP can have simple majority (273 seats at least) of its own from present tally of 240 seats. In such a scenario, Modi 3.0, which is still now ‘walking on two crutches’ (supports) provided by TDP-AP-Naidu and JDU-Nitish Kumar-BR, will be able to stand up and walk of its own; i.e. may be able to run the government freely without pressure from key allies.

Thus Nifty scaled a fresh life time around 24307.90 Wednesday (3rd July) after PM Modi delivered a ‘spirited political’ speech in reply to opposition/LOP’s ‘spirited’ speeches in the 1st round of political showdown for the short opening session of the 18th LS/Parliament session. Also, hopes & hopes of a blockbuster budget (FY25) to be presented in mid-July boosted Dalal Street. The market is now expecting a deluge of reforms/policy actions and fiscal/infra stimulus from Modi 3.0, for not only the next 5 years but also 25 years, so that India could be transformed into a developed economy from developing with the tag of 3rd largest economy in the world by 2030-2047/50.

Nifty jumped almost +3000 points from the exact poll day panic low (4th June) around 21281.45 to 24307.90 on 3rd July; i.e. over +14% in around 30 days and +12% in H1CY24 from Dec’23 closing levels on hopes & hypes of political & policy stability in Modi 3.0 coupled with positive global (Wall Street) cues amid hopes & hypes of an early Fed pivot. But India’s Dalal Street was also affected by a report (trial balloon) that there may be an additional tax on the FNO (Future & Option) trading system in line with 30% business income tax to curb increasing retail interest as it’s causing wealth destruction among India’s retail traders/investors.

Anyway, looking ahead, Modi 3.0 may face difficulties in meeting demands of huge fiscal grants from key allies like TDP (Naidu) for AP (Andhra Pradesh) and JDU (Nitish Kumar) for Bihar (BR) for above INR 1T (~$13B) each for their states. This may open Pandora’s Box as many other ‘bankrupt’ or even ‘rich’ states may demand similar grants for their states. Due to decades of economic mismanagement, huge government spending for infra, salaries & pensions, and various social welfare schemes much more than core tax revenues by both Federal and state governments, almost all Indian state governments and also Federal governments are now nearly bankrupt; have to take a fresh loan just to make payment of interest of previous loans.

Almost 45% of the core tax revenue of the Federal government is being spent on interest payments on public debt and 35% on government salaries & pensions. The same is also almost the same for states on average; both are highly indebted. The overall public debt of Indian Federal and state governments are now around INR 205T; although most of the public debt is in LCU (Local Currency Unit), a higher deficit, higher debt and more devaluation of LCU are causing hotter inflation and higher cost of living, lower discretionary consumer spending, lower production and eventually lower real income; i.e. this vicious cycle will eventually affect the economy.

Although PM Modi is trying his best to look and sound strong administrator (dictator) as in Modi 1.0 and 2.0, his real test would be now how to manage/handle the demands of key allies like TDP and JDU, upon whose support his government (Modi 3.0) is now running. Although Modi may be able to manage these allies amid PMLA/ED/CBI power, the overall fiscal equation may be affected.

Looking ahead, the market focus will be also on key state elections in late 2024 in Maharashtra (MH), Haryana (HR), and Jharkhand (JH) and also in Delhi (DL), and Bihar (BR) by early- late 2025. Modi has to win these elections (at least in MH, HR, and BR as BJP is the incumbent party) to consolidate his position in the party (BJP/RSS).

But considering very poor performances in the recent LS elections and the fading Modi wave, it would be very difficult for Modi this time to win in these state elections. In that scenario, PM Modi may have to exit electoral politics by late 2025 ‘gracefully’ on BJP’s 75-year ‘Retirement’ policy and RSS may back moderate Nitin Gadkari as the next PM Candidate of the ruling party BJP (face-saving exit for Modi). Thus Modi 3.0 may be too preoccupied with politics rather than economics unlike in Modi 1.0 & 2.0.

Overall, considering the overall RSS/BJP narrative which does not support Modi behind the scenes/camera now, and also Modi & Co.’s body language indicates the ‘Marg Darshan’ option for PM Modi to take early retirement by Dec’25. By Sep’25, Modi will be turned 75 years of age, while RSS will also celebrate its 100 years. If Modi indeed took an early face-saving exit from active politics by 2025 or even by 2026-27, then Gadkari or Rajnath Singh or even Shah may be in the race for the next PM post within BJP/NDA; Gadkari may be the next preferred PM candidate by a large section of BJP, and RSS Nagpur/MH business lobby.

Now from politics to economics, on 1st July, S&P/HSBC Global final data shows India’s Manufacturing PMI was revised lower at 58.3 in June up from 58.5 against 57.5 sequential reading. The latest reading indicated a sharper improvement in business conditions, as strong demand conditions spurred the expansions in new orders, output, and buying levels. At the same time, firms raised employment at the fastest rate seen in more than 19 years of data collection. Stocks of purchased materials also rose at a near-record pace, supported by another improvement in suppliers' delivery times.

On prices, input price inflation eased in May, but was nonetheless among the highest since August 2022. As a result, companies lifted selling prices to the greatest extent since May 2022. Lastly, the outlook for the manufacturing sector remains positive, with firms expecting further improvements in demand and order book volumes in the year ahead. However, the future output index fell to a three-month low.

On 3rd July, S&P/HSBC Global's final data shows India’s Service PMI was revised higher to 60.5 in June from a flash reading of 60.4 and above May's five-month low of 60.2, lower than initial market forecasts of 60.6. This marked the 35th consecutive month of growth in services activity, supported by a faster rise in new orders, with an unprecedented expansion in foreign sales (service exports). Employment increased at the fastest pace since Aug’22, while the job creation rose the most in 22 months, highlighting a mixture of short-term and permanent hires for junior, medium, and senior-level positions. On the price front, input price inflation slowed and was the softest in four months while output cost inflation eased to the slowest since February. Finally, business confidence weakened to an 11-month low, owing to concerns surrounding market uncertainty and competition.

Finally, S&P/HSBC Global final data shows India’s Composite PMI was at 60.9 in June, in line with flash estimates, recovered from May's five-month low of 60.5. It marked the 35th straight month of expansion in private sector activity, with the latest figure considerably above the long-run average amid robust output from the manufacturing and service sectors. New business expanded sharply, helped by stronger demand for goods producers and service providers. At the same time, overseas sales (exports) were near-record upturn.

Employment growth was also strong, as the pace was among the quickest since the series started in December 2005. In detail, there were faster increases in employment for both manufacturing and service sectors, with the former posting a series-record upswing. On prices, input cost rose at the slowest pace in four months while selling charges increased to the same extent as in May. In both cases, the quicker uptick was in the manufacturing industry.

Comments by S&P Global/HSBC about India’s June PMI:

·         The Indian manufacturing sector ended the June quarter on a stronger footing. The headline manufacturing PMI rose by 0.8 percentage points to 58.3 in June, supported by increased new orders and output

·         Consequently, firms increased their hiring at the fastest pace in over 19 years

·         Input buying activity also rose during the month

·         On the price front, input costs moderated slightly in June, but remained at elevated levels

·         Manufacturers were able to pass on higher costs to customers, as demand remained robust, resulting in improved margin

·         While the overall outlook for the manufacturing sector remains positive, the future output index receded to a three-month low, albeit it remains above the historical average.

·         Activity growth in India’s service sector accelerated in June, with the index rising by 0.3 ppt to 60.5, led by an increase in both domestic and international new orders. This encouraged services firms to increase their staffing levels at the fastest pace since August 2022

·         Input costs rose at a moderate pace, resulting in a softer uptick in output charges in June.

·         Overall, service providers remain confident about the year-ahead business outlook, although the level of optimism moderated sharply during the month.

·         The Composite PMI also accelerated in June, supported by greater inflows of new orders.

·         Manufacturing firms contributed more to the expansion than services firms.

Overall, S&P Global/HSBC indicated upbeat private business activities in June coupled with an improvement in employment and also hotter inflation as producers are increasing prices (soon after the June election) at a record pace having still substantial pricing power due to increasing population, increasing middle class, increasing demand and also huge fiscal stimulus related to overall election spending (almost around INR 1.50T). India’s service, as well as goods export, also improved in June amid robust IT/software and defense-related goods; as per reports, Israel may be buying Indian military equipment from India amid the lingering Gaza war.

Conclusions:

The Indian market has enjoyed the ‘Modi’ premium for the last 10 years due to political and policy stability, a rare phenomenon in today’s world, especially in EMs. But despite a huge political mandate, Modi was only able to bring incremental rather than monumental policy reforms on the economy and some other aspects. Also, the pace of PSU disinvestments has slowed significantly in recent years, while India desperately needs additional fund support for growing deficit spending, especially for traditional infra and social infra.

In the coming months, the ‘Modi’ premium for the Indian market may reduce due to political and policy uncertainty amid the compulsion of coalition politics under weak Modi 3.0. India’s coalition politics may be comparable to playing chess with each other along with extensive usage of money and muscle power. Indian politics is very complex and the election is heavily dependent on caste and freebies issues rather than core economic issues and its solution.

But if both BJP and Cong, two major political parties in India can maintain a cohesive/bipartisan economic policy (like Democrats and Republicans in the US) despite divergent political views/ideology, then India may continue to enjoy the ‘EM Scarcity’ premium and the appeal of 6Ds (development, demand, democracy, demography, deregulation and digitalization). Even 20% of the Indian middle class (around 300M) is equivalent to the whole US middle-class population, having significant discretionary consumer spending capacities.

India is a big and lucrative market in the world, going for 3rd largest in the coming years irrespective of Modinomics, Gadkarinomics, or even Gandhinomics; it’s now an arithmetical eventuality due to the huge population. But in terms of GDP/Capita, India remains lowest in G20 and also at 145th rank globally. Thus there is a huge scope for improvement for India.

In any case, Modi 4.0 may not be possible after the 2029 election, as Modi will be almost 80 years of age by then, higher than the usual 75-year retirement policy from active politics (‘Marg Darshan’ policy of BJP).

Fair Valuation of Nifty/India 50:

Nifty is now trading around 24300 levels with TTM EPS (FY24) around 1051 and a decent PE around 23; looking ahead assuming an average CAGR of 15% in EPS (against 7% real GDP growths) and 20 fair PE, the fair valuation of Nifty may be around 24200 by Dec’24; 27850 by Dec’25 and 32030 by Dec’26; i.e. Nifty is now trading around projected fair value of FY25 assuming EPS around 1209 (~15% growth from FY24 levels; although it may be +20% growth if RBI cuts rate early; but that may not be the case as RBI may start cutting rates in line with Fed from Dec’24 or even Feb’25).

Market impact:

In terms of index points, for the last month, Nifty was boosted by HDFC Bank, ICICI Bank, RIL, INFY, Axis Bank, Bharti Airtel, TCS, Kotak Bank, M&M, SBIN, HCLTECH, Adani Ports, Ultratech Cement, Tata Motors, L&T, NTPC, Grasim, Power Grid and ITC, while dragged by Maruti and HUL to some extent. Overall, India’s Dalal Street (NSE/BSE) was boosted by techs, realty, media, infra, banks & financials, energy, pharma, metals/materials, and automobiles, while dragged by FMCG to some extent. Overall, Nifty surged almost +7.50% in the last 30 days.

Bottom-line:

All is not good for Modi 3.0, which is now a minority government, potentially being controlled by the whims & fancies of two key regional political parties (TDP and JDU & Co). This along with internal tussle over power/control within RSS/BJP along with state election issues in the coming months may keep Modi too much occupied with politics rather than economics. Thus, even if Nifty scales over 24K on hopes & hypes of a blockbuster budget and political/policy stability by Modi 3.0, Nifty may soon stumble amid the reality of political & policy paralysis.

In the forthcoming budget, there may be some additional personal tax cuts in the form of higher SD (standard deduction) to Rs.1.00 lacs. Modi may also give priority to various infra projects in AP and Bihar with an emphasis on disinvestments/monetization of various PSU units/assets as India’s Federal debt (without states) is now fast approaching INR 200T (~$2.41T), more than 100% of real GDP. India has to fund the requirement of huge deficit spending in various ways including higher revenue from tax and also sales of PSU assets/companies.

For that there is a need for political partisan not only between BJP and INC but also among various regional political parties to fund deficit spending as there is limited scope for further incremental debt; too much debt, even in LCU may mean higher money printing/higher liquidity and negative for the economy. Although PM Modi is now trying for political consensus on major economic issues, it may be too late and too little considering the nature of dictatorship and vendetta politics for the last ten years.

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future/ India 50 CFD (24350) now has to sustain over 24650 for any further rally to 24850*-25075 levels in the coming days/weeks; otherwise sustaining below 24600/24500-24400/24300 may further fall to 24000/23700-23300*/23000 and further to 22800/22600*-22300/21800/21300* and further to 21150/21000*-20400/20000* and even 19700/19400-19200/18800 and 18500*/17500-17300/15650 in the coming days (under weak Modi 3.0 scenario).