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India: landslide re-election victory for Narendra Modi

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

India has had its say and decisively chosen Prime Minister Narendra Modi to lead the country for another five years.

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It has taken six weeks to complete the mammoth task of asking 900 million eligible voters to take part in the world’s largest election. Mr Modi, a humble tea-seller’s son from Gujarat has caught the imagination of many Indians with his drive to build a “New India”.

His uplifting message five years ago led to the Bharatiya Janata Party (BJP) winning the first single-party parliamentary majority after 30 years of troublesome coalitions. With a reputation for being a decisive, business-friendly leader, he rose to power on high hopes that he would be able to unlock the economic potential of the Indian economy towards one that could rival the might of China.

However since taking power in 2014, the road has not been smooth. While the prime minister boasts that India has grown faster under his leadership than ever before, in some areas the economy has been spluttering. In the three months to 31 December, growth in gross domestic product (GDP) has slowed to just 6.6% - its slowest pace in five quarters, industrial output has fallen steadily and sales of passenger vehicles have dropped 17% in the year to April.

As in most general elections the state of the economy has been a key issue. Droughts and declining commodity prices have hit farmers hard and unemployment in the country is the highest it’s been since the 1970s.

Small businesses that make up the backbone of the Indian economy have also struggled thanks to Modi’s decision to demonetise two high value notes in 2017 and introduce a new goods and services tax (GST).

However these issues have not hurt the electorate enough to look elsewhere for a leader, at least not for now. The government has got an unprecedented opportunity to build on the base it has created to revive the economy in its second term.

Stepping away from the short-term noise, the long term outlook for India remains positive. Many investors highlight the country’s favourable demographics. The median age is just 27 and nearly seven in 10 Indians are currently under the age of 35. However, this is only part of the story. Radical improvements in terms of per-person productivity due to capital investments and better technology will play an even more important role.

According to UN estimates, India’s population is expected to overtake China’s in 2028 to become the world’s most populous nation. As China’s population plateaus and its economy shows signs of slowing down over trade wars with the US, we can expect other emerging markets, such as India, to play catch up.

In PwC’s report The World in 2050 the consulting firm predicts that India, alongside Vietnam and Bangladesh could be the fastest growing economies over the period to 2050, averaging growth of around 5% a year.

Nick Price, portfolio manager of Fidelity Emerging Markets Fund is positive on India’s long-term prospects given its structural growth prospects and high-quality companies. He continues to favour financial companies such as HDFC Bank and Housing Development Finance Corp Ltd, which in an inflationary environment are able to protect their earnings by raising the interest charged on loans.

As an emerging economy, adjusting to Prime Minister Modi’s economic reforms, investors in India can expect stock market volatility along the way. However this provides an excellent hunting ground for active funds investing in the region, where managers can take advantage of any short-term dips.

Our Select 50 list of recommended funds offers five funds in the Asia and Emerging Markets category to consider, including the Fidelity Emerging Markets Fund, Stewart Asia Pacific Leaders Fund and Merion Asia Pacific Fund. All are positioned to capitalise on the long-term growth potential of emerging markets like India, with the flexibility to invest across different countries and regions wherever they believe the best opportunities can be found.

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