By Nicholas A. Vardy, CFA
After yet another lousy year in 2014, international stock markets have rallied strongly out of the starting gates this year. Leading the pack through the first three weeks of the year is one of last year's top performers, India.
Of the 46 global markets exchange-traded funds (ETFs) I track each day at my firm, India is the year's top performer with a 10.16% year-to-date gain in the benchmark WisdomTree India Earnings ETF /zigman2/quotes/200018626/composite EPI +1.17% .
By way of comparison, the S&P 500 has barely flat this year, and ranks a lowly number 30 on that list.
Even as the stock markets of leading emerging markets like Brazil, Russia and China are bouncing back after a dismal 2014, India has broken away from its BRIC rivals, both in terms of market performance and its prospects for economic growth.
The Modi bull market
Having stayed together for close to 60 years, India is a remarkably complex country. Its mixture of competing ethnicities, religions and castes are far beyond most investors’ ability to comprehend.
That said, in my opinion, the explanation for India's current bull market is quite simple: the election of Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) party in a landslide victory last May. In sweeping the Indian National Congress from power, Modi's election was hailed as the biggest change in Indian politics since the nation gained independence in 1947.
The promise of Modi's brand of pro-market policies launched Indian stocks on an upward trajectory even before the final votes were counted. Hailed by some as the " Ronald Reagan of India ," Modi's mantra is " less government, more governance ."
By the end of 2014, Modi and the BJP launched a flurry of activity, kicking investor-friendly reforms back into high gear. The government introduced legislation to make it easier for big industrial projects to acquire land; to increase the limit on foreign investment in the insurance sector and to allow for the re-auctioning of coal-mining licenses.
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. The railway sector has been also completely opened up to foreign ownership. The hiring and firing of employees has been made easier.
An interest-rate-driven tailwind
Thus far, it's been the introduction of Modi's reforms that have caused its stock market to soar.
But just a week ago, the Indian stock market just got an even bigger boost when the Reserve Bank of India (RBI), India's version of the Fed, cut its benchmark interest rate by 25 basis points to 7.75%. Although 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.
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 announced at just 5%, well below analysts' forecasts. That gave the RBI the green light to slash interest rates.
Sure enough, India's stock market spiked on the RBI rate cut news. For investors, the interest-rate cut was yet another catalyst for the Indian economy and the Indian stock market. The collapsing price of oil may mean that there's more to come.
Prime Minister Modi boasted impressive economic achievements while he ran the state of Gujarat. The question is can the "Ronald Reagan of India" do the same for the rest of the country? Time will tell.
But for now, enjoy the ride in what is likely to remain one of the world's best-performing stock markets in 2015.