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Market watch

India: Optimism tinged with caution

Issue date: 2019-09-26

Aberdeen Standard Investments

Markets are now facing a lots of uncertainties. US-China trade brinkmanship has reared its ugly head, continuing to cloud the outlook for emerging markets. Global liquidity is draining much faster than anticipated, as we appear to be transitioning from an era of monetary easing to a phase of monetary tightening. Thrust into the mix were volatile crude prices, exacting their toll on countries which import most of their oil needs, including India which faced immense pressure on its currency and current account deficit earlier in 2018.


For India, the big domestic concern has been the liquidity squeeze in the non-banking financial companies (NBFC) sector. This has its genesis in the default of IL&FS, a major infrastructure financing and construction company which twisted and buckled under its US$12.6 billion debt. As discussed with several of the local companies, the risk lies in asset liability mismatching. Some of the NBFCs have borrowed short-term when their revenue streams are longer-term, throwing their debt refinancing ability into serious doubt.

This problem has been exacerbated to some extent by a draconian Reserve Bank of India (RBI) that has arguably been overly rigid. The important point here is that solvency doesn’t seem to be an issue, although the crisis has reinforced the criticism levied at the RBI for failing to regulate the sector appropriately and being too tough on the public sector (PSU) banks, thereby trapping liquidity in the system.

We’ve seen periodic skirmishes of varying magnitudes between the RBI and the Modi government, which finally blew up into an open and unbridled acrimony between RBI governor Urjit Patel and the finance ministry in late October 2018 because of the NBFC crisis. This has led to the RBI loosening its stance towards limiting the PSU banks, and the expectation is that Patel is unlikely to see his term renewed in September 2019.

Given the above, we would expect tamer credit growth in the NBFC sector, and flowing from there, a slowdown in real estate development and unsecured retail lending. We also see a flight to quality. This will be positive for our private-sector banks, which are well capitalised and have solid deposit bases. They should gain market share and benefit from reduced competition amid NBFC consolidation.

Outside of the financial sector, we’ve had positive updates from the consumer and IT sectors. The outlook appeared more mixed among materials names. In the fast-moving consumer goods (FMCG) segment, a major retailer is seeing strong momentum in its results and remains leveraged to a recovery in rural consumption. IT sector also struck a positive tone with structural change playing out in its favour. Clients are in increasing need of digital transformation with more of their work core to their business models, for instance in retail and manufacturing, which will benefit IT companies with scale.


Looking ahead

India remains a safe haven amid the uncertain global backdrop. Real GDP growth is still robust at around 7%. Inflationary pressures are benign, particularly as Brent crude, the international oil benchmark, has fallen from a year’s peak of US$86 to US$60 in just two months. Expectations are also rising of a revival in the capex cycle, following the disruptions caused by GST and demonetisation.

That said, going into 2019, our optimism is tinged with some caution. Certain sectors are trading at significantly higher multiples than their historical averages, notably consumer staples. This has been fuelled by strong domestic inflows into mutual funds and a re-rating of growth stocks globally. Meanwhile, the third-quarter results season saw consensus cuts to Nifty earnings by 3%. Competitive intensity remains high with operating margins contracting over the past few years, excluding financials and commodities. Moreover, at 74% aggregate industrial capacity utilisation remains below the level seen in the last recovery cycle (of above 80%), so some analysts have indicated that it could take another few years of healthy growth before the private sector really starts to ramp up new capacity.

Over the longer term, we continue to view India as among our favoured Asian markets. India boasts some of the best-quality businesses in the region, offering a good mix of well-managed local companies and multinationals. Growth prospects remain compelling, underpinned by structural positives of a young population and expanding middle class, while the country is less export dependent than many of its peers. In the current environment, companies with pricing power and robust balance sheets will benefit. We still favor companies that will continue to gain from India’s long-term consumption trends, as well as those that play into the strength of what it has to offer in IT services for instance. We believe that India still has much more to offer.

Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.


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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