Exit polls predict that Modi should return to power in India with another 5-year term. The election was a blot of uncertainty on the landscape but, barring a Modi loss (votes are counted on the 23rd May), it should mean no major deviation from the root-and-branch reform program that has materially changed the prospects of the Indian economy. Although the easy gains are likely behind us for the Indian trade as reform progress slows, the country nonetheless looks like the ‘best looking horse in the glue factory’ when it comes to Asia EM, and this could help its assets to outperform despite some signs of overvaluation and short-term overboughtness.

The top-left chart shows stocks have a had a big bounce taking them close to new highs in the wake of the election exit polls. However breadth, in the bottom pane, is not near extremes. On valuations, Indian equities’ P/Es look stretched, but they do not look nearly as bad when adjusted for earnings growth (top-right chart). From an economic perspective, the outlook continues to look strong, with India our best performing leading indicator in Asia EM by far (bottom-left chart). Moreover, India is relatively insulated from the US-China trade war. Its total exports as a percentage of GDP is on the low side for Asia EM, and only about 5% of its exports go to China. Indian assets (stocks+bonds) continue to look good medium and long-term investments.

(Click on image to enlarge)

Source: Bloomberg, Macrobond, Variant Perception