Why the outlook looks bright for India
Avinash Vazirani, Fund Manager, Indian Equities, explains why India has sold off less sharply than many other global equity markets year to date. He also discusses why the outlook for India still looks positive over the longer term.
While Indian equities are down around 9% year to date in local currency terms (and down almost 13% in US dollar terms), they have outperformed many global equity indices over that period. I believe this is primarily due to three reasons.
Firstly, India has continued to deliver decent GDP growth, and its growth outlook remains positive. Secondly, we’re seeing strong corporate profitability growth, with recent earnings coming in well ahead of expectations, generally up around 30%-40% since last year (albeit from a low base, given Covid-19 disruption). Thirdly, India has considerable excess savings – UBS estimates that around $250bn of excess savings was built up in India during Covid.
We’re seeing significant allocations by domestic investors into equity markets; over the past two years, individual depository equity accounts have gone up from around 33m to just under 100m accounts. Investors are saving on a monthly basis, with many taking out 5- or 10-year investment plans. In fact, in the second half of 2021 alone, more money was invested in Indian equities by domestic investors than was invested by foreign investors for the full seven years prior to that.
And, despite market falls, that money continues to flow in. We’re seeing a resurgence in the equity investing culture that has been around since the Bombay Stock Exchange was first formed in 1875. During the Global Financial Crisis, many people lost a lot of money, which did deter domestic investors from equity investing for some time afterwards. However, we are now seeing a new generation of domestic investors coming to the market who weren’t investing in it over the previous decade. So that money, along with investment from individual pension plans, is flowing into the Indian equities.
In terms of the broader economy, I think we’ve seen significant positive changes in India in the past three or four years which are not currently priced into the market. For example, India is almost completely digitised now: virtually everyone has a bank account, India is a leader in terms of advances in fintech, and it has a young population which helps to drive high demand for tech. Over half a million jobs were created in the tech sector in India last year, and c.700,000 more are expected to be created this year. These kinds of jobs are generally well paid, and they allow people to spend more money on housing, cars etc. I believe this trend is set to continue for several years.
In terms of inflation, while it is still high there, paradoxically it’s the first time in my lifetime it’s been lower in India than in the West. Companies have been able to pass on high oil and commodity prices – transportation and cement costs have gone up, for example – as the economy is strong enough to take these price increases.
Government finances have also never been in a better shape. Supported by the strong shift in digitisation, indirect tax revenues are up over 100% over two years. Furthermore, India has sizeable FX reserves of around $600 billion, and we are seeing similar surpluses across Asia. After what we’ve seen happen in Russia, where its reserve assets were frozen following the Ukraine invasion, I expect we’ll see monetisation of India’s reserves domestically i.e. we’ll see these reserves being invested into India. This will happen in other countries which have large reserves too. Countries with surplus reserves are also likely to look for alternatives to traditional deposits in USD/EUR/GBP/JPY. In my view, such flows are likely to benefit countries like India which are able to support large inflows.
Emerging market debt: Is this as bad as it gets?
Reza Karim, Fund Manager, Emerging Market Debt, explains how the asset class has fared this year and which segments of the market offer potential opportunities for investors.
The emerging markets debt (EMD) sovereign Index is down 17% year to date, while the corporate index is down 12%, about the same as US high yield, and outperforming US investment grade. The key driver of the sell-off is the US Treasury market which has been down 8%. So, the extra loss from EMD credit alone is around 4%, and that is despite the impact in emerging markets of the Russia-Ukraine war and volatility from the Chinese real estate market.
The EMD market has two components, the rate component and the EM credit risk component. If someone were to take the view that interest rates are close to stabilising, then now is the time to look at EMD. The main component of the current selloff has been interest rates rather than local risk.
Since the EM index started in 2000 there have been negative returns in only three years: 2008, 2013, 2018. In 2008, for example, the index was down 16%, and the year after it rose 35% and then next year it was up 13%. Markets can, and do, bounce back.
At current yields, we believe emerging market credit looks very attractive compared to history. The question is when to invest, and where? Risk-adjusted returns are historically strongest in corporate EMD, compared to sovereign and local currency debt. If an investor wants to take a long-term view and does not want to try to time the market, then EMD corporate is the most suitable allocation, in our view. Given the move in rates this year, higher-duration EMD sovereigns have the most potential to deliver short-term returns if one think there is going to be a change in both interest rates and EM sentiment.
In our strategy, the main thing we favour right now are inflation beneficiaries, asking ourselves which countries and corporates can benefit from higher prices. Brazil, for example, has companies that can benefit from inflation and higher commodity prices, and a central bank that is credible. We also like Angola because of the high oil price and the consequent positive impact on its debt to GDP ratio.
The biggest beneficiary of the current commodity shock is the Middle East, where budget deficits have improved massively, because of the oil industry. However, valuations are very expensive in our view, which limits our appetite for adding more exposure. In short, we are looking for countries that are beneficiaries of inflation but where it’s not already priced in.
The value of active minds – independent thinking:
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