Indian equities have performed well in recent years, but the country’s macro picture has largely disappointed over the past 18 months – with the dual impact of demonetisation and the implementation of the Goods and Services Tax impacting on growth.
However, the tide has seemingly turned, as the macro landscape has recently stabilised in the reforming nation, with growth now starting to come through faster than expected.
This broad economic growth upswing is also translating to the corporate sector. We expect NIFTY earnings growth over the full year, which completed at the end of March, to come in at 14% – near the initial expectations a year ago. This is a far cry from previous years, where initial earnings forecasts were continually revised downwards to the low single digits.
India remains ‘buy and hold’
Irrespective of the recent market volatility, India has always been a ‘buy and hold’ market, with several positive long-term drivers for the country – such as demographics, the multi-generational urbanisation shift, the stability of government and the ongoing reform agenda.
However, there have been a number of sector laggards over the past year or so – such as IT. We are marginally underweight IT, one of the largest sectors in the market, and are looking for windows of opportunity to potentially increase our allocation to this area – particularly if you make the case the US dollar should strengthen from here.
As for financials, the other major weight in the index, there is a clear distinction between the different segments of the space. To us, the public-sector banks are flashing a red light, the non-banking sector financials are showing amber and it is green for the private sector banks – where we still have exposure to high-quality franchises such as HDFC.
India often gets painted with a negative brush when it comes to corporate governance, particularly evidenced by the recent strife witnessed in public sector banks, but we continue to see improving governance standards and levels of disclosure.
Importance of domestic drivers
As for the political situation, India’s current backdrop could be argued as calm, relative to the rest of the world. Prime Minister Narendra Modi has been in charge for nearly four years and has recently strengthened his power at state level ahead of the next general election – which is likely to come early next year.
In fact, political turbulence is much more apparent in other areas of the world right now – evidenced by the current trade tensions between US President Donald Trump and China. It is unlikely Trump will turn his attention to India, with India’s total exposure to the US market as a share of GDP is just 3% on a gross basis, or $77bn. The trade surplus is a mere 1% of GDP.
However, while the direct impact of Trump taking on the world with his protectionist mindset is limited in relation to the Indian economy, it would be unwise to discount entirely the indirect consequences – as history suggests protectionist policies damage the entire global economy. As such, Indian businesses will be acutely aware of the possible implications to industries such as steel, IT and healthcare – particularly the generic drug space. Despite the risk, it is important not to forget India remains a largely domestically-driven economy.
For investors who missed out on the strong rise for Indian equities in 2017, the volatility we have witnessed recently could provide an attractive entry point to a market we still believe offers strong potential over the medium to long term. Our focus remains on unearthing the companies able to reap the benefits of the country’s numerous positive fundamental factors.
By Simon Finch, co-manager of the Ashburton Chindia Equity fund