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Should you invest in the fastest-growing market of the year?

The Indian market is set to boom following its recent election result, according to a number of industry experts, raising the question of whether investors should buy back in.

The market has been riding high in recent weeks after it became clear the likely winner of national elections would be Narendra Modi, who has emphasised a pro-business agenda.

Sam Vecht. manager of the Blackrock Emerging Markets Absolute Return fund is bullish that India’s economy will take a boost following Modi’s election success, increasing exposure to the region.

Narendra Modi and the BJP’s stunning election win has rightly been hailed as the beginning of a new era for India,” he said.

“He and his party will have a mandate to reform and change the country that no other government has enjoyed for a generation.”

“We are long term bulls on India, given its entrepreneurial culture, industrious workforce and high savings rate. The currently low level of financial penetration and GDP per capita leave plenty of room for future growth. “

He says he further increased exposure to the region in summer 2013 despite widespread concern in the market about India’s current account problems and a falling Rupee.

“At that time, and now, our preference is for domestic cylicals and stocks, especially state owned enterprises that would benefit from meaningful governmental reform.”

“Many of these stocks have gone up substantially in the last nine months, but they continue to offer value and much preferred to the exporters and defensive consumer names.”

However, he says the country is a long term play as it will likely continue to experience volatility.

“Changing India’s business culture is a monumental task, and one that is unlikely to be achieved in the market’s all-too-often myopic timeframe. As such, while we retain a positive view for now, the appearance of excessive euphoria about India’s short-term prospects would lead us to trim positions.”

According to FE Analytics, all 11 India funds in the IMA universe have made double digit returns since the beginning of 2014, in contrast to 2013 and 2011 where they all lost money.

The three best performing funds over five years are FF India Focus, Invesco India Equity and GS India Equity. which was the only fund to make money over a three year measure.

They all returned at least 10 percentage points more than the MSCI India, which rose 53.89 per cent over the same period.

Performance of funds and benchmark over 5yrs

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Despite stellar long-term growth, the Indian stock markets have been amongst the most volatile indices over the past decade in both emerging and developed markets.

Performance of indices over 10yrs

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The country’s rate of growth, whilst still high by developed markets comparisons, has also slowed to its lowest level in a decade coupled with a torrid time for emerging markets in general of late.

Performance of indices in 2014

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Investors have been flocking away from the asset class over the past year, prompted by hints the Fed would taper its monthly economic stimulus program and raise interest rates. When the tapering began in January 2014, this only deepened investors’ cagey sentiment to emerging markets.

However, after the recent landslide electoral victory of Modi and his Bharatiya Janata Party (BJP), the possibility of making money from the country’s booming economy is back in many investors’ minds.

Commentators say the new government in Delhi will boost markets as well as providing structural reforms.

Hugh Young. managing director of Aberdeen Asset Management Asia says Modi’s offered to revive the economy with business-friendly policies and increased focus on infrastructure will be a boost for investors in India, but warns that there are headwinds.

“India is experiencing its slowest growth in a decade, at 4.7 per cent in the last quarter. Although the country’s current account deficit has narrowed significantly, inflation remains high.

“Food prices are creeping up again and slowing consumer demand has put the brakes on new spending by companies. That said, the country’s prospects are well-supported by a huge domestic market, a young and growing workforce, and an expanding middle class.”

“We’ve been fans of corporate India for a long time. Companies we invest in are well run and have a strong shareholder culture. For example, HDFC, a leading mortgage provider has excellent quality assets.”

“Another company we admire is Godrej Consumer Products, a home-grown maker of household and personal products with a leading position both domestically and in other emerging markets.”

Craig Botham, emerging markets economist at Schroder’s is also enthused that Modi’s victory could invigorate the Indian economy.

He says that overall the election result is a positive one for the Indian economy and its investors. “Over the longer term, inefficiencies in the land and labour markets must be addressed, and the tricky issue of foreign investment resolved. A majority for the BJP greatly reduces the need for compromise and could mean that we see reforms pushed through relatively quickly.”

“There had been a risk that results would disappoint and that the optimism of recent months would sour. Instead, the count has surprised to the upside, giving investors a fresh injection of hope.”

“The inbox for the new government is a busy one. There is an investment bottleneck to clear, fiscal consolidation will be important, and central bank governor Raghuram Rajan is keen to move to inflation targeting.”

Chris Wise, investment director for Gemmell Financial Services, says investors should avoid a purely India focused fund such as those already highlighted and instead use a general emerging market fund for exposure to the country,

The opaqueness of its economy and companies makes it a risky destination despite a recent leap in its stock markets, Wise says.

Wise recommends investors use the 285m Allianz BRIC Allstars funds, which mainly invests across Brazil, Russia, India and China.

“Because of the higher volatility we have great comfort in general emerging market exposure and leave managing it to the skill of the manager,” he said.

“There will always be a question mark over the level of analysis of stocks within India funds investors can do, it’s incredibly difficult.”

“By avoiding pure exposure to India by instead using an emerging market or global fund means investors can cherry-pick how they are invested in the country whilst capturing some its growth.”

“Even with the result and its knock-on effect to the stock markets we’d rather be a bit more cautious.”

Among the winners from a recent upsurge in the country’s markets are the First State suite of funds focused on Asia, which took a contrarian bet on Indian stocks at the end of 2013.