FIIs have more questions than answers after BJP's sweep

Concerns surround BJP's prime ministerial candidate Narendra Modi and his ability to revive the economy

After the heat and dust has settled around India’s state election results, which saw the Bharatiya Janata Party (BJP) drubbing the Congress in three of the four states, foreign institutional investors (FIIs) remain worried. Though foreign investors have been rooting for the BJP’s prime ministerial candidate Narendra Modi quite publicly, they are asking around to understand if Modi can deliver. It’s interesting that they are asking these questions now.

Saurabh Mukherjea, chief executive officer of institutional equities at Ambit Capital, who has met around 30 FIIs in Europe and the US over two weeks, says these investors are naturally focused on the political situation in India and its impact on the economy. Most FIIs are keen to understand the correlation between politics and economics, as their portfolio have been highly concentrated in very expensive defensives over the last few years. If the economy is set to recover and flourish under a new government, FIIs would like to play the recovery theme. The Asia strategist at Bank of America Merrill Lynch believes the “policy ignition” theme will dominate stock picking strategies in 2014.

Not surprising, then, that FIIs are trying to get a sense of when economic recovery will begin after the trough it hit in FY14. Bhavtosh Vajpayee, head of equities at Barclays, says foreign funds have been under pressure to change their portfolios as the flavour of the market has shifted from quality defensives, which are obviously not inexpensive, to a value rally, which has seen various beaten-down stocks and sectors perform.

A key variable to economic recovery is the political government at the Centre. After voting with their feet on change, FIIs are asking whether Narendra Modi can deliver at a national level. Ambit Capital was asked this question by FIIs  during their trip. The brokerage in its response said Modi succeeded in Gujarat by giving functional autonomy to the bureaucracy and marginalising the state ministers.

However,  this strategy might not work in a coalition government, as the BJP is only expected to get about 175 seats out of 543 Lok Sabha seats in 2014. Despite the election results pointing to a anti-Congress wave, there is no clarity on when the economy will turn a corner as Modi’s decisiveness, as a leader cannot unlock projects spread over different states. Ambit’s Mukherjea has concluded from his interactions with companies that capex plans have been lined up and with the next government these will be rolled out. But till old projects are revived, fresh investments could remain elusive, some other foreign fund managers argue.