The three questions looming over India
Returning from a recent research trip, Kunal Desai, manager of the Neptune India Fund, reflects on what has been a mixed start to 2016 for India after a period of stellar growth.
Following our recent research trip to India, it was clear to see that global investors had been stung by the start of this year and this has had an impact on consensus expectations. A poll at the BoAML conference in Delhi showed that 60% of delegates expected no US Fed interest rate hikes this year.
Furthermore, consensus suggests that there will be flat to mildly negative returns across Asia in 2016, although 65% of respondents cited India as their favourite Asian market. Since getting back from India markets have rebounded strongly, with the MSCI India index currently flat year-to-date.
We believe investors understand the relative strength of India versus global emerging markets, yet more is now required to drive an absolute return story. This will ultimately come down to an earnings upgrade cycle, which has yet to fully materialise.
On the reform aspect, the details are impressive, although investors hoping for ‘big bang’ policy moves will be disappointed. Valuations in India are now reasonable, particularly in some mid-cap areas, where we believe the most interesting stories exist.
Given this backdrop, three key questions loom large: firstly, do Prime Minister Modi’s reform policies still offer hope for investors; secondly, what exactly is required to drive an earnings upgrade cycle; and finally, which areas of the market do we believe are most promising?
1. Is India’s reform agenda now ‘Reform Light’?
Details on reform continue to impress. During our trip, finance and road ministers stressed that the initiatives they are introducing are designed to boost productive capacity, but looking at a simplistic headline checklist is inadequate.
The Reserve Bank of India (RBI) and government policymakers all talked about ‘getting it right this time’. Rather than taking shortcuts to boost temporary periods of hyper growth, platforms are being created for more sustainable long-term growth.
We believe that the government and RBI – which are working closer together than they ever have – are maintaining a focus on the self-help story, by continuing to move doggedly in a pro-investment, pro-market direction. All policymakers we spoke to stressed that there is little they can do by way of global issues, but that they have been told by Modi to ‘control their controllables’.
So what has been done? In Mumbai, at the Make in India Week exposition, attended by more than 10,000 government and business delegations from 72 countries, $220bn of investment was committed.
Whilst this figure does not necessarily translate into actual investment, the intent to propel foreign investment, thereby creating jobs and boosting manufacturing, is surprising. The majority of companies spoke of a demand uptick, with the most optimism in the bearings, engine manufacturers and cement industries.