Jonathan Schiessl (pictured) is CIO and lead manager of the Ashburton India Equity Opportunities Fund.
Investors are unlikely to forget the events of 2016 for some time, with global politics taking centre stage. India was also not without its drama, with the country taking significant steps along its road of reforms. While some reforms are likely to impact growth in the short term, these initiatives bode well for the health of the economy looking further ahead.
This year will also be crucial for India, with nearly a quarter of the population voting in local state elections. In addition, various reforms agreed in 2016 are due to be implemented.
The results from the local elections and progress of reforms will have a large bearing on the political fortunes of the Prime Minister – particularly as India edges closer to the general election in 2019. While markets will react to these events in real time, the good news is we start 2017 without the exuberance previously priced into Indian assets.
The most talked about reform of recent times was last November’s demonetisation – with the Indian government removing more than 80% of the currency in circulation overnight.
This daring demonetisation was implemented in virtual secrecy and was aimed at combatting India’s vast cash-based informal economy. Official figures in mid-December indicated more than 80% of the banned large denominated notes had been returned to the Reserve Bank of India (RBI).
It will still take some time before the new notes in circulation replace banned notes. If 15trn rupees of old notes has so far been returned, banks have disbursed about 8trn rupees in new notes, suggesting a considerable cash-crunch in certain pockets of the economy.
The government might not intend to reissue the same quantity of notes, as one of the main objectives of this action is to push consumers into electronic payment methods and the formal banking system.
There is no doubt the demonetisation has had a short-term negative impact on economic activity and growth, but we are still waiting for data showing the scale of the slowdown. We are currently fairly confident the worst is behind us and expect the economy to be back to normal through the second quarter of the year.
Just as we expect the economy to recover, another major reform will be implemented – one talked about for almost two decades – a pan-India goods and services tax (GST). The hurdles set against this reform have been monumental, as India’s complex federal and state taxes means it is very difficult to operate a business across India. By simplifying the tax system, the whole country should receive a big productivity and growth boost.
Growth is something this Prime Minister promised, but we will need to wait a little longer before he can deliver. Stock markets are forward looking, so ultimately the reforms we have seen are putting India on a much stronger footing.
We remain extremely positive on the outlook for India, but whether markets can rally in the short term will depend on the elections and the shape of the reform process. We may also have to contend with volatility surrounding potential policies from new US President Donald Trump.
So how are we positioned in this environment? First and foremost, India remains a domestic story, driven by long-term structural drivers of demographics and urbanisation. These factors lead us to primarily focus our investments on Indian-listed companies tapped into domestic demand.
In the broader emerging market context, India not only stands out in regard to structural growth, it also houses a host of world class companies across multiple sectors.
While we have overweight positions in consumer-focused companies across a variety of areas, we have a particular focus on the auto sector. We also have an overweight to the industrials sector, which is playing into India’s efforts to roll out much needed infrastructure. Our investments will benefit from the large uptick in spending on roads, as well as the development of rail and logistics facilities.
More recently, we have been adding to existing positions in the IT sector – effectively India’s exporters.
While we have been underweight to IT for some time, these names have brutally de-rated over worries of protectionism and the lack of spend in developed markets. We believe these worries are more than priced into stock prices – while we are also hopeful management in these cash-rich companies will embark on a more efficient cash management, via increased pay-outs or buybacks.
Having some exposure to Indian exporters also provides an element of protection against any unexpected Indian rupee weakness.