By James Saft
(Reuters) – Investor enthusiasm for new Indian Prime Minister-to-be Narendra Modi and for activist investment may spring from a common underlying cause: the reality of lower, less explosive growth.
India handed Modi and his Bharatiya Janata Party (BJP) a thumping victory in elections last week, setting off an equally explosive rally in shares, which jumped as much as 6 percent on the day of voting.
On the surface India’s rally, essentially a bet that Modi’s pro-business and development policies will succeed, seems very different from the joy with which investors have taken to greeting news that an activist investor has taken a stake in a company and is banging the table for change.
Underneath both can be seen as a reaction to more difficult times, conditions in which growth is at a premium.
Just as investors push for yield when interest rates decline, taking on more risk in search of a little extra return, so do they put a premium on potential cash flows as growth declines. That can be via genuine organic growth, as Modi hopes to create with infrastructure investment, or it can be the result of financial engineering, as with the share buybacks and dividends so often demanded by activists.