Last year Indian equities, like a slew of other emerging markets, had been given up for dead by many investors as the US Federal Reserve hinted that it would start cutting back on buying bonds to stimulate its economy.
Less cheap money being provided by the central bank would make risky assets such as emerging market stocks unattractive.
As well as the pressure from the outside, the Indian economy was also suffering and had been a member of the so-called “fragile five” along with Indonesia, South Africa, Turkey and Brazil because of its current account deficit and the dropping value of the rupee against the US dollar. Its companies were also not faring well as they were not working at full capacity, nor were they spending money on expanding.
This year, however, there has been a huge turnaround in the fortunes of the country’s listed companies, with the S&P BSE Sensex, a measure of 30 Indian major companies, rallying 33 per cent to a record high. Fund managers say that has been thanks mainly to a pick-up in economic activity that coincided with the election of the prime minister Narendra Modi, the head of the nationalist BJP party.
Mr Modi has pledged to make broad reforms, including the removal of energy subsidies, to bring about the high economic growth that marked the Indian economy during the 1990s and until about 2011.
“Last year some of the numbers were looking pretty bad and investors had reason to be concerned and growth was slipping. The headlines were focusing on government inaction and corruption,” says Singapore-based Sukumar Rajah, the chief investment officer for Asian equities at the asset manager Franklin Templeton.
“In some ways, Mr Modi started at the right time when things hit the bottom. We have seen a very big improvement in current account deficit, improvement in fiscal deficit. We have seen the reduction in fuel subsidies and we’ve also seen inflation decline meaningfully,” Mr Rajah says.
“Corporate earnings haven’t been boosted in a big way, but going forward, yes, I think it will have a positive effect.”
India’s economy is expected to grow 5.6 per cent this year and 6.4 per cent in 2015 according to the IMF. That is after growing about 4.5 per cent in 2013, its worst performance since 2002. In the decade that ended in 2011, the Indian economy grew 8 per cent annually.
Capital Economics, a London- based research company, attributes the slowdown last year to the reversal of fiscal and monetary stimulus pursued in 2009. Now, however, the research firm says not only is India on course to becoming the world’s fastest-growing economy, it is also on track to be the world’s most populous nation and may overtake China in 15 years.
“Over the medium term, India’s economy could, with the right policies, sustain GDP growth of 10 per cent,” says Shilan Shah, Capital Economics’ India economist.
“The BJP’s strong mandate following its election victory in May has raised hopes that wide-ranging structural reform will now be implemented to achieve this,” Mr Shah says.
“In our view, the government is likely to fall short of these expectations. Even so, we think that over the next decade India’s economy is still likely to double in size.”
So far, Mr Modi has reduced energy subsidies, allowed greater room for international investors to invest in property and is planning to end a state monopoly on mining and selling coal as part of his plan to increase growth. The economy has also been given a fillip in recent months by the fall in oil prices.
Since June, crude has shed about 30 per cent of its value amid a weakening of global demand. While falling oil prices may be a concern for the world’s biggest energy producers, such as Saudi Arabia and the UAE, it has been a blessing for poorer countries that do not have much oil and gas, such as India, because they don’t have to spend as much money importing oil.
All this has cheered global investors, who have poured more than US$13.8 billion into Indian equities this year. Leading the boom are companies that are poised to benefit from increased local demand.
Maruti Suzuki, the biggest listed car maker in India, has jumped more than 90 per cent, while ICICI Bank, India’s second-largest lender, has advanced in excess of 50 per cent. “The government has so far made reform progress by improving corporate governance, implementing changes to the labour market and opening sectors such as defence and insurance to direct foreign investment,” says Edward Evans, an emerging markets fund manager at Schroders, a London-based asset management company.
“The central bank is also moving toward an inflation targeting approach to monetary policy, which should be positive. Overall we remain optimistic about the prospect of reform by a Mr Modi-led government, although we expect measures to be gradual,” Mr Evans says.
The brightening economic outlook has also spurred more business activity and made companies less likely to default on debt. According to data compiled by Bloomberg, debt rating upgrades for Indian companies are exceeding downgrades by the most in three years. Rankings for 119 firms were raised last quarter at Crisil, Standard & Poor’s India unit, beating the 61 cuts at other companies. Despite the rally this year, many asset managers including, Schroders, Templeton and PineBridge still see value in Indian equities, mostly because company earnings are expected to accelerate following a number of sluggish years.
“I don’t think prices have outpaced fundamentals,” says Mr Sukumar. “The market is trading slightly above the long-term average in terms of price-to-earnings ratio but we are still at the start of a new cycle where the economic growth rate is not the actual rate and more importantly the corporate sector earnings growth is going to go into a much higher trajectory.
“It’s difficult to say in the last cycle when the margins started recovering, but the corporate earnings doubled within three years or so,” he says.
“If the margins start improving, then we can have a very sharp improvement in earnings.”
mkassem@thenational.ae
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