A three-year rally for Indian small-cap stocks may extend further on growing signs interest rates are headed down in the world’s fastest-growing economy, Mark Mobius said.

India is forecast to grow as much as 7.2 percent this year as Prime Minister Narendra Modi’s plans to boost infrastructure and open up industries such as railways and defense to foreign investment have also bolstered consumer spending. Mobius, the executive chairman of Templeton Emerging Markets Group, said the company has made the South Asian country a top pick in emerging markets and invested as much as $2 billion in its equities.

“India is in a very sweet spot,” Mobius said at a Bloomberg event in Mumbai on Friday. “There is so much variety and so much opportunity, particularly in the small- and medium-cap stocks.”

Mobius, 80, who is closely associated with raising the status of emerging markets as a place for investment, said Modi’s plans to overhaul the country’s economy are one of the most exciting things about India. While the plan to introduce a nationwide sales tax by April 1 may not be fully implemented in 2017, it’s a step in the right direction, Mobius said. Templeton has $600 million of its total Indian investment in small companies, he said in an interview in June.

David Fuller's view

I agree with all of these points.  Moreover, Narendra Modi is probably the world’s most business-savvy political leader in office today. 

As the second largest stock market in Asia, India often performs better when China is out of favour, and vice versa.  Moreover, while Narendra Modi is Prime Minister I maintain that India will generally outperform most other stock markets on an annual basis.  India’s next election is in 2019 and Modi is currently heavily favoured to win that as well, albeit probably with a smaller majority. 

I do have some concerns over the short to medium term.  This year’s upward trend by the Mumbai Index shown above has lost consistency in the region of its 2015 peak.  This may lead to a further ranging consolidation phase, or a more significant medium-term setback if the rising 200-day (40-week) moving average turns downwards.  Nevertheless, I would regard any significant setback as a buying opportunity.