India's domestic story stands out amid mixed Asian picture
Some readers will be aware of our thoughts on China and its credit-fuelled investment bubble. But it’s not all doom-and-gloom in Asia, with India a case in point.
2 March 2017
India’s demonetisation policy introduced in the fourth quarter of last year has clearly, and will continue to, cause a temporary slowdown in the economy.
India’s demonetisation entailed scrapping all 500 and 1000 rupee notes, approximately 86% of all banknotes in circulation. The measure was aimed at curbing the black market.
However, we don’t think it will cause any long-term damage to our thesis for the country. We see the slowdown very much as cyclical and recent company visits in India have confirmed that the economy is starting to normalise.
On the flip side, whether it achieves Modi’s goals to root out corruption and stem black money accumulation and bring India’s shadow economy (estimated by the World Bank at close to 25% of GDP) into the formal economy remains to be seen. At the margin it may, which should help direct tax collection which remains woefully low and is a serious impediment to much-needed investment in infrastructure, education and healthcare.
Overall, we view demonetisation, in the stockmarket context and for long-term investors, as mostly noise.
The key for the Indian stockmarket is that Modi continues with his plans to cut red tape, root out corruption, upgrade infrastructure, improve the fiscal position (hopefully passing the Goods & Services Tax) so that we finally see a pickup in investment and India is finally able to realise some of its potential. As the first chart below shows there has been no pickup in investment to date in India.
However, we hope the potential for falling interest rates (see second chart below), the final clear-out of bad assets in the public banks and fiscal consolidation will, once the effects of demonetisation have washed through, allow for a pickup in investment and stronger economic growth.
India remains the best domestic story in Asia at the moment – with current reforms and positive demographics in its favour. The base is low in India so the building of roads, provision of mobile telecoms networks, formal banking to the masses, and rooting out of middlemen and corruption can all make a big difference.
The frustration remains that stockmarket valuations are high so that bottom-up we struggle to justify the prices being asked for the better domestic names, although longer term the market continues to look attractive.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.