Will India Remain A Safe Harbour In Global Storm?Ritesh Jain
Victor Shvets who, along with market consensus, is overweight Indian Equities writes…India might become the focus of investors’ concerns…If EM equities continue to come under pressure, it is quite possible that it would be India that would deliver the next sharp pain jolt to investors. MSCI India has actually outperformed by ~5.5%, and together with Thai & Taiwan, it has been one of the best markets. India is where investors are hiding from a storm (trade and liquidity. while there are reasons to stay long, environment is changing.
India is a much larger (approximating the entire ASEAN) and deeper market. Second, while still poorly governed, it is becoming better administered, and from a very low base, India thus has been delivering strong growth while inflation has been range-bound. Third, India does not like when commodities are too high or too low; it needs ‘goldilocks’ and this is what investors had experienced. Fourth, India cannot tolerate extreme USD volatilities, and until several months ago, it benefited from low FX volatilities. Fifth, it is largely a domestically oriented economy, and in a world of disruption, it is perceived as a safe haven. Sixth, India has considerable accumulated liquidity, and foreigners are not large in its bond market (~5% vs 30-40% for Mal or Indo).
However, the environment is changing. First, FX volatilities are rising, and INR is coming under strong pressure. ( yeah right it was accident waiting to happen when there is loose talks from Ministry officials)
Second, rapidly declining currency is usually not a recipe for improved competitiveness but rather higher inflation; and this is occurring at the time when inflation rates have already been picking up over the last twelve months. (spot on! I don’t understand why Fund Managers don’t get that rates are gonna rise)
Third, India is running high twin-deficits (~9% of GDP). (get it guys, this kind of deficit is not sustainable for an Emerging economy. You cannot just spend by borrowing more)
Fourth, net FDIs are down from an annualized pace of $40bn to ~US$29-30bn. (yes FDI is better than FPI flows, at least we get to keep those dollars)
Fifth, RBI is behind the curve, and is likely to further tighten, which, depending on volatilities, could be faster than market expects. (absolutely, growth will be sacrificed because demand needs to be curtailed)
Sixth, India is going into national electoral cycle, which is never good news for either tactical or secular reforms. (more tactical than secular)
Seventh, equity investors remain exceptionally bullish, with EPS growth estimates in a 15-20% range per annum for three years forward while valuation multiples are more than one standard deviation above the mean. (how will you achieve 15-20% EPS growth if RBI is going to curtail final demand… you simply cannot)
Finally Victor is nervous but he is still positive on India (remember his KRA is to beat benchmark not deliver absolute returns inspite of market which is overvalued to the extent of 1 standard deviation from mean) .We are nervous and it is possible that India might be the next shoe to drop. However, what would replace India? Neither Indonesia nor china although he remains strong believers in China’s LT secular drivers. In the meantime, India’s external risks seem contained while its corporates are some of the best in the region ..
In addition, unlike other EMs, India retains the promise of sustained productivity gains.
Article by Ritesh Jain, World Out Of Whack