Will 2021 be the year for India?
Avinash Vazirani, Fund Manager, Global Emerging Markets, explained why he thinks we’re likely to hear a lot about India this year. For a start, the UK is currently trying to negotiate a trade deal with India, with a couple of ministerial visits already having taken place this month, and more to follow shortly, with a deal likely signed this year.
India’s GDP growth figures are also likely to make headlines: Bloomberg estimates GDP growth of more than 12% for the financial year starting 1 April, and while GDP numbers for the October-December quarter haven’t come out yet, they’re expected to be positive. Nominal growth of around 16%-17% (GDP growth plus inflation) for the financial year would be hugely significant, noted Avinash.
India’s handling of Covid-19 has been noteworthy, too. It has got a huge pharmaceutical manufacturing capability, and it’s likely to be the world’s largest producer of Covid-19 vaccines. It’s already producing the Oxford and Sputnik vaccines, and there are at least three other Indian vaccines being produced, one of which already has approval.
Covid-19 cases and deaths in India have been lower than one might have expected, partly helped by India’s fairly aggressive approach to handling the pandemic. As a result, India has been able to return to a sense of ‘normality’, apart from in few areas with higher rates. Businesses were therefore able to perform well during the festive season (October to December) as they were able to not only take advantage of high festive season volumes, but also pent-up demand from Covid-19, resulting in a phenomenal quarter for earnings, said Avinash.
The market has recovered sharply since the beginning of the pandemic, rising around 90% since March 2020 lows, which has a lot to do with liquidity. Less spoken about, however, is the decimation of the non-taxpaying, ‘unorganised’ sector. Cheap imports from China have also come down a bit, though not as far as India had hoped. Combined with the introduction of the Goods & Services Tax (GST), with everything being recorded electronically, small businesses have faced some operational difficulty, and business has been going to larger companies. We’ve also seen a huge impact from the growth of digital and better telecoms infrastructure, as Covid-19 has meant that many people in India have become part of the already growing online ecosystem. This has spurred a flurry of upcoming IPOs of Indian tech names.
In terms of valuations, while the market is still looking expensive overall, Avinash and the team are still able to find plenty of investment opportunities in companies with strong growth, but that in their view still looking relatively cheap.
Growth-driven inflation would be positive for emerging markets
The rise in US Treasury yields over February has been fast but it isn’t enough to cause sustainable damage to emerging markets, said Patty Cao, Assistant Fund Manager, Fixed Income.
The reflation narrative has dominated for a while now and while emerging markets are not immune to risk-off sentiment and Treasury volatility, Patty says inflation is not necessarily bad for many of these countries if it is growth-driven, particularly for emerging market currencies and corporate credit. There is currently a strong backdrop for growth in emerging markets, led by Asia, with China and India posting strong GDP growth at the end of 2020.
Other countries that look positive in terms of attractive yields include Turkey, which is benefiting from improved central bank policymaking with tighter monetary conditions, as well as South Africa and Mexico, the latter of which recently posted its strongest current account surplus since 1998.
Where are the opportunities in UK large caps?
It’s been a decent start to the year for the UK equity market, said James Bowmaker, Fund Manager, UK All Cap. At the turn of the year sentiment among sell-side analysts was very optimistic towards the UK, built on Brexit relief, the relative success of the vaccine rollout, and valuations.
Sterling has been strong versus the US dollar and the euro. Normally that would hold UK large caps back, given their tendency towards overseas earnings, said James, but the underlying drivers have had more than enough momentum to overcome that so far. Oil and metals prices have both been strong, for example, while yield curve steepening has helped the banks – together the Oil, Mining and Banks sectors make up more than a quarter of the UK market.
Of those three, James sees more opportunities in the Mining sector, as mining companies have been cautiously managed for years, with capex curtailed, balance sheets strengthened and dividends reset, and so are coming into this cycle with a good basis for future growth. By contrast, oil offers higher free cash flow yields but there are long term question marks about how they future-proof their businesses.
If those have been the positive year-to-date, what has been holding the FTSE back? James points to the high weightings in the Pharmaceutical and Consumer Staples sectors, with the former in particular falling out of favour as lockdowns ease and society reopens. Within Consumer Staples, now the biggest sector in the UK, there’s a dividing line between tobacco and non-tobacco. Tobacco stocks are out-and-out Value now, says James, but with long term question marks around their business models. When it comes to non-tobacco staples, the sector has been out of favour recently as the market burns off some of the excess valuations that had built up in previous years. James still wouldn’t describe them as ‘cheap’ though.
While the very start of the year was characterised by some excess optimism towards the UK, in James’s view, there nevertheless continue to be reasons for UK investors to feel hopeful about the future and opportunities still to be found.
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