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19th May 2016

India ray of sunshine amid gloomy global outlook

The forecast for global growth is looking a bit like a typical British summer. Gloomy to say the least. According to the latest Global Macro Outlook 2016–17 report from Moody's Investment Services, weak growth in emerging markets, driven by low commodity prices and waning export demand, will continue to act as a drag on the global economy this year.

The credit ratings agency said yesterday that the global recovery has weakened further and the outlook across countries remains uneven and largely weaker than in the previous two decades. Global trade is still subdued, while spillovers from emerging market shocks to financial markets globally have increased substantially.

A ray of sunshine

So amidst all the doom and gloom, it's always nice to see at least one ray of sunshine. In this case, India. While we are struggling to get near to 2% economic growth in the UK, as a net importer of commodities, India has benefited from their falling prices. Consequently, growth there is actually expected to rise, albeit modestly, from 7.3% last year to 7.5% this year1.

As the fourth-largest user and importer of oil in the world, India has been huge beneficiary of lower oil prices, which helped tame the country’s elevated inflation rate. India is also relatively less exposed to a global slowdown, given it has less dependence on exports than many other emerging markets. Furthermore, India has relatively low trade linkages with China, particularly compared with other Asian economies.

Since Prime Minister Modi came into power almost exactly two years ago, economic reform has been top of the agenda and, according to Prashant Khemka and Hiren Dasani, managers of Elite Rated Goldman Sachs India Equity Portfolio, the focus on improving the ease of doing business in the country is already reaping results. They believe that other initiatives emphasising investment in infrastructure and industrial projects should also help improve business and investor confidence and kick-start the capital spending cycle from the low point reached last year.

Rain, rain don't go away

While we all want to rain to go away in Britain, India's farmers are dependent on the monsoons for irrigation. More than 50% of the population is directly or indirectly dependent on the agriculture sector for a livelihood and only around 50% of the gross sown area has access to irrigation facilities. So this is one area where the recent India finance budget sought to make a difference: rural and agricultural capital expenditure was sharply increased. Expansion of irrigation coverage, crop insurance and farmer profitability were all addressed. They also sought to increase rural consumption.

Hiren said: “With expectations running high for India, particularly for the government’s reform agenda, any indications of a loss of momentum on reforms, or a weakening of the party’s stature, could pose as risks to investors. Inflation has been a key challenge for the country and if it were to rise rather than fall, as expected, India’s growth could be negatively impacted. Similarly, while consensus expectations are for a low oil price in the near-term, significantly higher oil prices or a sharp spike could worsen India’s current account position and be detrimental to India’s economy.”

Prashant added: “However, we continue to believe that investors underestimate the upside potential in the Indian equity market. We expect earnings growth to accelerate from the subdued high single-digit levels of the past three years. Valuations may ultimately prove to be quite attractive if this is indeed the early stages of a multi-year earnings growth cycle. Even if multiples were to stay where they are, Indian markets can still provide healthy earnings-based returns from here on out.

“In our view, the macroeconomic environment for India is better now than at any point in the past five years.”


Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The managers' views are their own and do not constitute financial advice.

1Global Macro Outlook 2016–17, Moody's Investors Service, Global Credit Research, 18/05/2016

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