By Nicole Hong and Shefali Anand
Dec. 1, 2014 3:36 p.m. ET
When India’s newly elected prime minister visited New York in September, almost 20,000 people showed up to see Narendra Modi speak at Madison Square Garden, about the same number who turned out to see Billy Joel earlier that month.
Investors around the world are giving Mr. Modi, and India, the rock star treatment.
Money managers have poured $16.5 billion into Indian stocks this year, the most of any developing country tracked by the Institute of International Finance. India’s S&P BSE Sensex has soared 35% this year, closing at a record 54 times in 2014.
Investors are betting that Mr. Modi, elected in a landslide in May, will introduce policies to jump-start India’s economy, boosting profits at companies ranging from banks to cement makers. It is a sharp reversal in sentiment for a country that had been in its worst slowdown since the 1980s. Just last year, Morgan Stanley labeled India one of the “fragile five” emerging economies most at risk from slowing growth and ballooning deficits.
India’s changing fortunes illustrate how investors are eager to pile into countries that promise to unlock faster growth, at a time when most developing markets are slowing and wealthy economies are sluggish. The payoffs would be huge. India is the world’s 10th-biggest economy, but its performance has often lagged behind other emerging markets due to the country’s unwieldy bureaucracy and poor infrastructure.
Economists predict India will expand at a faster rate this year, the only one of the BRIC countries—which include Brazil, Russia and China—expected to accelerate. The International Monetary Fund expects growth in India to reach 6.4% next year, from 5.6% this year. For money managers who have to invest billions on behalf of large institutions, India may be one of the last developing economies of its size that can offer steady, highflying returns.
“The potential of India, which had been suppressed for so long, could finally…be unlocked,” said Rasmus Nemmoe, a portfolio manager at LGM Investments, which oversees $2.8 billion. He has bought Indian stocks over the past year, and they now make up 25% of his emerging-markets portfolio
However, the success or failure of this big India bet will ride on whether Mr. Modi can overcome decades of steeped bureaucracy in the country. Data released last week showed India’s economic growth slowed in the third quarter, raising concerns about how quickly Mr. Modi can implement politically tough overhauls. So much money has crowded into India’s stock market that any disappointment or unforeseen event could push it into a downward spiral.
Some analysts said Mr. Modi could struggle to push through politically unpopular overhauls. In the next few weeks, lawmakers are expected to take up a bill toward establishing a national tax for goods and services. But the government faces hurdles in winning over states run by political parties that oppose the plan.
“Expectations have been quite high for reform in India, but some of the hard data doesn’t really tally up,” said Shilan Shah, India economist for research firm Capital Economics, pointing to the lack of improvement in the country’s industrial production and export growth since Mr. Modi took office. “Some progress has been made…but it’s been a little bit underwhelming given [Mr. Modi’s] mandate.”