How India Became a 2015 Market Leader

The global market horses are off to the 2015 races, and leading the pack through the first two-plus weeks of the year is India.

Of the 46 global markets I track each day at my firm Global Guru Capital, India has shot out in front of the pack with a 6.7% year-to-date gain in the benchmark WisdomTree India Earnings ETF (EPI). By way of comparison, stocks in the U.S. benchmark S&P 500 Index are down about 2% so far this year.

Even as the stock markets of other leading BRIC emerging markets like Brazil, Russia and China struggle, India has broken away from its major rivals, both in terms of market performance and expectations for the prospects for its economy.

What Do Louisiana and India Have in Common?

Truth be told, I was prompted to write about India this week not only because of its stock market’s great start to 2015, but also because on Monday, I met Louisiana Governor Bobby Jindal. Jindal was in London to meet with members of British Parliament at Westminster. That’s where I had the opportunity to chat with him.

If you’re familiar with Jindal, you’ll know that he’s a popular figure in both Louisiana and national politics. He is also a rising star and potential presidential candidate in the Republican Party.

Jindal also is of Indian descent.

Although Gov. Jindal was born in Louisiana, his parents were from Punjab, India, and they came to America about six months before his birth.

As an Indian reporter noted yesterday, Jindal is so popular in India that if the entire world could vote for the U.S. President, Jindal would be a shoe-in by successfully attracting all of India’s close to one billion voters.

As his speech at Westminster confirmed, Gov. Jindal is a “Reagan” conservative, and he’s an exponent of free markets and smaller government.

What I found more interesting was that his beliefs also happen to be consistent with India’s current government, led by Prime Minister Narendra Modi.

The Modi Market Tailwind

As I wrote last May, Modi’s “Reaganesque” brand of pro-economic policies has been the bullish catalyst for Indian stocks since he was elected.

Modi and his BJP party came to power in a landslide victory last May, sweeping the Indian National Congress from power. The election was a clear and decisive win for Modi and the BJP, hailed as the biggest change in Indian politics since the nation gained independence in 1947.

More importantly for its economy, Modi’s win brought with it the promise of better days ahead for India.

Following the first few months after his May 2014 election win, Modi made slow progress on crucial structural reforms to kick-start India’s economy.

However, by the end of the year, Modi and the BJP became “hyperactive,” according to the Economist. New bills presented to parliament include reforms designed to make it easier for big industrial projects to acquire land; to increase the cap on foreign investment in the insurance sector; and the re-auctioning of coal-mining licenses.

Modi made other changes that have also impressed the financial markets. India now has streamlined the approvals process for investment projects. The number of days required to register a business has been reduced from 27 to now just one day. Also, the railway sector now will be completely opened up to foreign ownership.

The government has amended the Factories Act and the Apprentices Act to make hiring easier, which commentator R. Jagannathan deemed a “radical step.” Modi also plans to introduce a law to establish a uniform rate of GST (the equivalent of the value-added tax, or VAT) across the country, thereby cutting bureaucracy and bolstering trade.

An Interest-Driven Bull Run

The promise of these types of reforms provided a Modi-led market tailwind to the Indian stock market entering 2015.

But the Indian stock market just got an even bigger boost — courtesy of its central bank.

Last week, the Reserve Bank of India (RBI) cut its benchmark interest rate by 25 basis points to 7.75%.

While the decision wasn’t a total surprise, the cut came outside of the normal cycle of monetary-policy decisions and weeks before the bank’s scheduled policy meeting.

So you can appreciate the significance of the RBI’s move, it is as if Fed Chair Janet Yellen cut the Fed Funds Rate between Federal Open Market Committee (FOMC) meetings.

In fact, Yellen’s Indian counterpart, RBI Governor Raghuram Rajan, a former chief economist at the World Bank and professor at the University of Chicago, had signaled back in December that he would cut interest rates before the RBI’s next regularly scheduled policy meeting, provided inflation data remained tame.

On Jan. 13, India’s consumer-price inflation data for December was just 5%. That was well below analysts’ forecasts, hence the green light to slash interest rates.

As you might expect, India’s stock market spiked on the RBI rate cut news. Moreover, the between-meetings cut by Rajan and his RBI colleagues raises the likelihood of further interest rate cuts in future meetings.

For investors, the interest rate cut is yet another catalyst for the Indian economy and the Indian stock market — and part of a chain of bullish events set in motion by the election of Modi and the BJP last May.

Winston Churchill, no great fan of the country, once called India “merely a geographical expression. It is no more a single country than the equator.”

I believe the opposite.

India is a remarkably complex country. It has an admixture of competing ethnicities, religions and castes far beyond your average investor’s ability to comprehend.

And yet it is remarkable how Reagan-style reforms of deregulation and reduction of government interference are viewed by investors around the planet as the key to economic success.

And that applies whether you’re the Reagan of India or a conservative Indian-American in Louisiana.

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NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Financial Publications.

In case you missed it, I encourage you to read my e-letter column from last week about how you could profit from the income investing panic of 2015. I also invite you to comment in the space provided below.