Perspective: the prospects for Indian assets in 2019
Politics could drive performance of Indian assets on a near-term basis, but the long-term fundamental case for investment in India is robust, argues India Investment Specialist, Jigar Gandhi.
- Political uncertainty ahead of impending elections poses a risk to markets
- Despite some near-term challenges, India’s economic outlook is positive
- The long-term upside for investing in India remains compelling
2018 was a volatile year for Indian markets, and that looks set to continue, at least in the first half of this year. General elections are due to be held in April-May. Financial markets will likely favour an election outcome that provides the next administration with a clear mandate to govern. Coalition structures carry a risk of policy paralysis and could indirectly slow the decision making process, affecting the performance of Indian markets. The impact of election results, however, tends to be short-term in nature. These are invariably overshadowed by the state of the economy and corporate earnings growth.
India’s macroeconomic backdrop has improved
On the macroeconomic front, there is room for optimism. India’s economy is expected to gather momentum, driven by consumption demand, while higher capacity utilisation is likely to filter through to rising capital expenditure. Also working in India’s favour is the domestically driven nature of its economy, which should help it emerge relatively unscathed from the US-China trade war.
The growth environment is further supported by moderating inflation, thanks to sharp falls in commodity prices including, most importantly, crude oil; India is a net oil importer. Stable inflation and the more benign oil price have eased pressure on the Indian rupee. This should allow the Reserve Bank of India (RBI) to hold off on interest rate hikes. But there is a caveat. Crude prices are likely to stay volatile, given heightened geopolitical tensions and the demand-supply mismatch.
Another welcome development is that the banking system, which has long struggled with burgeoning bad loans, is slowly but surely recovering. Incremental non-performing loans have slowed, while the pending big-ticket defaults are being resolved. Meanwhile, the government is taking steps to improve competitiveness and the ease of doing business. That has helped attract the attention of global capital flows.
This is not to suggest that India’s economy is without short-term headwinds. Tepid food inflation is an indication of stress in the rural sector. Large increases in the minimum support prices for agricultural produce have not had much impact. At the same time, rural credit needs have been hurt by disruption in the non-banking financial sector. With general elections approaching, the government may well resort to populist spending that puts fiscal targets at risk.
What does all this mean for Indian markets?
We believe quality companies, the standout performers in the equity market last year, will be resilient in 2019. In our opinion, the market has become increasingly discerning, and quality companies have consistently performed well, despite short-term market sentiment. That is why our focus remains on fundamentally sound stocks with strong earnings growth and niche business models.
Investors need to remain mindful that past performance is not a reliable indicator of future results.
On the fixed income side, 2019 is likely to be a better year thanks to lower crude prices, a more stable macroeconomic environment, and easing liquidity pressures. There are downside risks on the horizon, however. The fiscal position could remain an overhang given lower-than-expected indirect tax collections and subdued non-tax revenue growth. Potential policy changes at the RBI, under its newly appointed governor, may also sow short-term uncertainty.
On balance, we do not think there is a material risk of financial instability, which means that the RBI is likely to keep its inflation focus. With the current inflation trajectory and the RBI’s projection of 4% this year, we do not see significant moves in the repo rate front for the rest of the financial year. The repo rate is the short-term rate that the central bank lends to commercial banks.
All told, India remains a bright spot within emerging markets. It retains its tag as one of the fastest-growing nations in GDP growth terms, as growth across most of the developing world has waned amid a weakening global economy. Furthermore, high real rates and a steady currency make India an attractive destination for foreign debt capital.
Long-term structural changes encouraging
Perhaps the most compelling argument in favour of investing in India is its long-term potential. The government has been undertaking landmark reforms, albeit slowly. These include the introduction of a goods and services tax and a bankruptcy code, regulations around real estate, as well as land acquisition and labour laws. There have been other positive steps, such as curbing corruption and enabling direct benefit transfer to the economically challenged. Financial inclusion with the help of low-cost mobile technology and Aadhaar, a biometric identification scheme, are also beneficial to society.
Technology, in particular, has transformed the business landscape. India now has the world’s second-largest internet user base, helped by affordable smartphones and 4G networks. The country is also a leader in mobile internet usage; close to 80% of web traffic is accessed through mobile phones. This is giving rise to unique mobile-first business models and reshaping industries, including e-commerce and entertainment.
Moreover, technology has resulted in dramatic changes to the payments infrastructure. Aadhaar provided the framework for a national digital payment system – the Unified Payments Interface (UPI). Since its launch, the UPI, which allows money transfers using mobile phones, has shown brisk growth (see chart below). And it should help bring more sections of the population into the formal economy.
Overall, therefore, the long-term investment case for India remains very attractive. Investors may fret over volatile markets in the near term, but we are convinced of the country’s prospects in the long run.