On Monday the Indian equity market had a slight correction with the S&P BSE Small cap index declining 3.5% and the mid-cap gauge 2.7% versus Sensex’s 1.2%. Market capitalization can depreciate further. However, based on the key fundamentals of the Indian economy this may represent opportunities to enter Indian market.
India has developed into the world’s seventh biggest economy and remains among the most compelling long term investment opportunities anywhere in the world. It continues growing, outpacing most developed countries that barely grow in current days. A number of certain indicators and reforms make it the best time to invest in the region.
India has finally introduced goods and services tax reform that was initiated on July 1, 2017, and is expected to affect over 1 billion Indians. The reform should bringing small and medium-sized enterprises into the formal economy through recognition of their existence as taxable entities. According to estimates of various research companies, the reform is expected to increase India’s GDP by 0.8 percent to 1 percent over the next 2-3 years. The enlarged tax base should improve central and state fiscal budgets and therefore promote the country towards a credit upgrade. India has also removed 500 and 1,000 rupee notes from circulation overnight. The move was designed to tackle criminal and black-market activities by forcing those with high-value notes to put them into the banking system. These factors will both have the long term impact of raising government revenue and accelerating the formalisation of the economy, and are ultimately growth-positive. There was a sharp increase in the Manufacturing PMI data, which rose to 51.2 from 47.9 in July. We believe this highlights that the one-off impact of GST implementation on 1st July is already beginning to dissipate more quickly than expected, and that the outlook for growth even on a 1-2 quarter view is more positive. With Modi being elected for the second term further key structural economic reforms will promote India’s growth. Current priority will be programs on agriculture, power distribution, affordable housing, delivery of more LPG cylinders, rural connectivity and direct transfer of subsidies to poor people along with a renewed push for land and labor reforms through state governments.
Consumer price index softened this year which was attributed to subdued food price inflation and low crude oil prices. India imports almost 80% of its oil, so, like Turkey, it benefits from lower prices as its import bill falls and, with it, its trade deficit. Normally, low oil prices are expected to help to keep a lid on inflation too, and also the fiscal deficit, since India has long subsidised fuel prices, which requires a lot of money from the government. Current account deficit continues to narrow further in the fiscal year ending March 2017. On a cumulative basis for FY17 India’s Current account deficit came in lower at 0.7% of GDP versus 1.1% in FY16 on the back of a lower trade deficit. Foreign Direct Investment remained steady at $35.6 bn, and foreign institutional investor inflows were higher at $7.5 bn reversing the outflows in FY16. In the meantime state-run Chinese companies are willing to pursue investments in India via stakes in power and construction sectors. They are looking at infrastructure development and power transmission projects in India with plans to invest as much as $59bn in infrastructure projects such as roads and railways. the Reserve Bank of India provided another 25bps interest rate cut at the August meeting, in order to support economic growth. Given that India still has 400bps of real interest rates, which is among the highest in emerging markets, with inflation around 2%, there is still ample room for the central bank to cut further.
With this in mind, the economic backdrop in India remains highly conducive to growth acceleration. Low and stable inflation, falling interest rates, record high foreign investment, prudent fiscal policy and a low oil price give us the conviction that India’s economy will return to +7% GDP growth rates in the near future. Government debt is also improving. All of this can be clearly seen in the economic data below sourced from the IMF.
If everything remains on track, India can be in the first stage of a consistent multi-year bull market. GDP growth is already strengthening which is faster than China and that is even before the impact of the reforms that recently took place. Valuations are far from expensive according to different ratios and we expect continued growth in equity markets. With the recent market sell-off an opportunity may arise where investors could benefit from higher potential returns. There are plenty of investment instruments to invest into Indian equity markets. I had a look into the Singapore MAS retail approved fund list and came across Pinebridge India fund that considerably outperforms MSCI India (Indian equity benchmark) and iShares MSCI India passive ETF.
India Fixed income has also been appreciating in value due to interest rate cuts. And with current central bank policy bonds are anticipated to increase in value further. Below is the chat of HSBC Indian Fixed Income fund which could represent a more prudent investment play to equities, but where we can still derive benefits from all of the positive factors for India listed above. (Fund yield is 7%)
Author: Sergey Yakovenko
Please feel free to contact me with any questions or thoughts on investing in India