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Market watch

Is the India promise fading?

Issue date: 2019-10-01

Aberdeen Standard Investments

2018 first half has been a slog for Indian equities. The market is barely staying afloat after a strong run last year. Despite an economy that remains among the fastest growing in the world, a slew of external and domestic worries have kept market bulls at bay. Crude prices that have risen from $45 to above $70 a barrel in just a year could inflict pain on an economy that imports most of the oil it consumes, along with fiscal and current account risks. Already, this is pressuring the rupee, which has sunk to five-year lows against the U.S. dollar.

If the U.S. Federal Reserve (Fed) raises rates faster than expected, this could further impinge on inflation and already hawkish monetary policy. Add to the mix geopolitical risk, with US-China trade tensions escalating despite US-EU tensions eased as both parties agreed to suspend new tariffs. In July, China and the US imposed tariffs on US$34 billion of each other’s exports.

Domestically, the re-introduction of a long-term capital gains tax, which has raised the hurdle rate for returns, and fraud at the country’s second largest bank have weighed on the market recently. Meanwhile, Prime Minister Narendra Modi has been following his reform agenda to the letter. First demonetization, then Goods and Services Tax (GST), followed by digitization, the bankruptcy act and the land bill. They are being set in place one after another. While some reforms have induced acute short-term pain, they set the scene well for economic prospects over the long run. Take GST, for instance. It widens the tax base, simplifies businesses and cuts red tape across state and federal lines, even though implementation has been far from smooth.


Facing political uncertainty

Such commitment to reform has come at a cost to Modi, who is less popular today compared to the rapt attention he received when he first came to power in 2014. Already, he is facing key local and state polls ahead of the 2019 general elections, including Karnataka. In this election, Modi is personally leading the Bharatiya Janata Party’s (BJP) campaign to wrest control from the main Congress opposition. His main rally cry has been “sarkar badlisi , BJP gellisi” or “change the government and bring BJP to power.” At the end, Modi’s ruling party Bharatiya Janata Party (BJP) has won the most votes in Karnataka but failed to form a majority in the assembly, and Congress Party has retained control of the state by unifying with other opposition parties.

With three more state elections to come this year, pundits are divided over whether Modi would be able to keep his majority in next year’s general election or be forced into cobbling together a coalition.

Amid political uncertainty and economic pressures, we believe India offers a more reassuring picture on the ground. While GST-related disruptions hampered earnings last year, we are seeing signs of a nascent demand recovery, as orders pick up across various sectors.


Healthy across sectors

The information technology (IT) industry is at an inflection point. The sector appears on the cusp of a cyclical upswing after prolonged weakness caused by a structural shift towards digital as well as U.S.-related pricing and wage pressures. Our visits to our core holdings reflected the improving outlook for IT spending. Some companies are benefiting from U.S. tax reform, while others can expect robust revenue growth from consumers.

In the consumer sector, demand is on the recovery track. In fact, we’re finally seeing demand and trade channels normalize post-GST. Volumes are recovering, although there are concerns over cost inflation. There is also evidence of strong progress among companies across other sectors, including materials, industrials and financials.


Long term value intact

Amid the disparity between the macro and political uncertainty and what we're witnessing from companies on the ground, we continue to view India as among our favored Asian markets. There is a plethora of quality businesses to choose from, coupled with structural positives of a young population and expanding middle class. The recent market weakness has brought valuations down to levels that are more in line with Asian peers. And if stocks were to fall further, investors could potentially purchase more of the stocks they like. Over the long term, India still has much to offer.

Chart 1: Corporate profit on the rise again*
*Estimate Forecast is offered as opinion and is not reflective of potential performance. Forecast is not guaranteed and actual events or results may differ
Source: CLSA, CLSA forecasts, April 2018


Chart 2: Consumption is recovering
Private consumption outpacing gross domestic product (GDP)
Source: CMIE, CLSA, May 2018


Chart 3: Valuations turning more reasonable
MSCI India Index one-year forward price-earnings ratio (x)
Source: Bloomberg, 30 June 2018. For illustrative purposes only.


Important information

The above is strictly for information purposes only and should not be construed as advice or an offer or solicitation, to deal in any investment product. Any research or analysis used in the preparation of the above information, procured by Aberdeen Standard Investments (Hong Kong) Limited for its own use and purpose, is based upon sources believed to be reliable as of the date thereof, but no representation or warranty is given as to the accuracy or completeness of data sourced from third parties. Any projections or other forward-looking statements regarding future events or performance of countries, markets or companies are not necessarily indicative of, and may differ from, actual events or results. Opinions, estimates or forecasts may be changed at any time without prior warning.

Investment involves risk. Past performance is not a guide to future performance. Investment returns are denominated in the base currency of the fund. US / HK dollar based investors are therefore exposed to fluctuations in the US dollar / HK dollar / base currency exchange rate. Investors may not get back the amount they have invested. No liability whatsoever is accepted for any loss arising from any person acting on any information contained in this document.

Investors should not make an investment into the investment product based solely on this document and should read the relevant offering documents for more details to ensure that they fully understand the associated risks before investing.

Investors are responsible for their investment decisions and should ensure that the intermediary has advised on the investment product’s suitability and consistency with their investment objective and risk tolerance level. If in doubt, please seek independent financial and professional advice.

This document is issued by Aberdeen Standard Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission.



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