Modi halo effect has come off, says CLSA

But believes India still the most promising emerging market story over 5-10 years

The Modi phenomenon, which helped the Indian markets climb record highs, seem to be wearing off, said influential brokerage CLSA. It, however, said the Indian market still is one of the most promising emerging market over a five to ten-year horizon.

"After several days spent in India around the anniversary of Narendra Modi taking over as PrimeMinister on 26 May 2014, there is no doubt that the halo effect has come off the Modi phenomenon," wrote Christopher Wood, managing director and chief strategist, CLSA in his newsletter Greed & fear dated June 4.

"should make it clear at the outset that the view is maintained here that India is the most promising major emerging market story on a five to ten year view globally," he added.

CLSA said that it is evident that Modi running the government with a five to ten year view. He said the fluctuations in the market are not a priority to the government. "Much more important to the Indian leader is attracting investment and generating job growth," Wood said.

The country's benchmark indices after climbing to record levels in early March have come off by more than 10 per cent as corporate earnings have failed to justify the run up in stock prices, which has fueled concerns over the real strength of the economy.

"The negative investment case for India is at the moment easy to make, most particularly from a stock market point of view. While the GDP data does not look so bad, most particularly based on the new revised data, the bottom-up picture looks much more discouraging with earnings actually down year-on-year for the fiscal year that has just ended," the CLSA report said.

CLSA said the earnings of the companies under its coverage have declined nearly 14 per cent year-on-year during the March 2015 quarter.

"The big negative for the Indian stock market is seemingly high consensus earnings expectations and the lack of more aggressive monetary easing," it noted.

On the positive said CLSA said that it expects the Reserve Bank of India to lower interest rates by another 125 basis points by end of 2016. Also, it says the valuation of the Indian market has now slipped below its long-term averages. The benchmark Sensex, CLSA said, trades at 15.6 times compared to 10-year average of 16.1 times.

CLSA says if the benchmark indices end flat for 2015 it would view it as a healthy consolidation. The Indian market?after rally as much as 10 per cent during 2015?are currently down about 3 per cent year to date.