Indian equities are at all time highs, and the reverberations around PM Modi's emphatic victory are widespread for EM.  

IndiaFlagWhile the SENSEX anticipated victory for PM Modi in India over the course of the spring, it should be noted that his control of the lower house is something that should allow this pro-biz leader to finally do something in India.

India is arguably more important than China in terms of the near term growth story, and it's arguably more important to emerging markets in terms of what investors hope they are buying when they seek consumer consumption growth and economic mobility.

India is 1.2Bn people, so effectively the same size as China (rounding error at this level!). China is viewing economic transition in decade terms; India is viewing economic transition now. China is clearly more important to commodity producers but just about everyone else is looking at the India opportunity, especially global retailers like Walmart (WMT, quote), Tesco (TESO, quote) and mobile phone and search players (hardware, connectivity, infrastructure) like Apple (AAPL, quote), Vodafone (VOD, quote)) and Google (GOOG, quote).

After a huge move in the market, what is the opportunity in India? The currency can appreciate. The Rupee  (INR, quote) was a disaster last summer, and inflation is always an issue coupled with current account questions. But India gets the benefit of commodities being largely softer, and other inflationary inputs under control. The current account has improved dramatically to a point where we are seeing trends that can give the government more flexibility to run a more aggressive budget. The Rupee has rallied dramatically off the lows but a look at the long term chart (attached) you can see where the INR has traded over last five years and pre-crisis. We think a move to 55INR in the near term is something you should expect.

The market despite the move is not expensive. India always trades at a premium to China and much of Asia, but at 15.1X next year, the market is inline with fair value and below five-year averages. Companies are getting a pass on earnings this quarter and may next quarter but we need to see recovery in EPS.

While an economic reform agenda wont be terribly beneficial to industrial names, it will be so for financials and consumer focused firms. The most obvious and easiest play in India for western investors are banks: ICICI (IBN, quote) and HDFC Bank (HDB, quote).

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