Will India be the big surprise for 2015?
Let me keep this Friday piece short as I am going to go a little out of my wheelhouse and talk about India. I have been hearing a lot of positive noises about India from various sources including Eswar Presad, Willem Buiter and Christopher Wood. As we head into 2015, we are all looking at the risks in emerging markets like Russia, Venezuela, Nigeria and so forth. But India seems to be a play that deserves a fair degree of attention as they may surprise to the upside.
India is an oil importer that should be getting big dividends from the decline in oil prices. Yet, earlier this week the rupee fell to its lowest level in more than a year, a clear case of emerging market contagion. People who are covering India say that not only should India receive benefits from lower oil import prices but also that monetary credibility and better fiscal management make India a winner for 2015.
For example, Willem Buiter, Cit’s chief economist says that India’s growth in 2014 was better than 2013 and that he expects it to be even better in 2015. He is pegging growth at 6%, which is just 1% less than China’s expected 7% growth target. Buiter told CNBC India that in the first instance India has very sound monetary and exchange rate management. And this is due to the appointment of noted economist Raghuram Rajan to head the central bank. And Buiter also says that fiscal management has improved. I expect this would make India less vulnerable than it was during the taper tantrum in 2013 when India was in big trouble.
Erin Ade spoke to Eswar Presad yesterday on Boom Bust, the finance show I am producing. And in a segment which isn’t going to air until next week, she asked Presad about India’s economy. He echoed Buiter’s confidence, noting the same two big factors. First, Rajan has really brought credibility to the Reserve Bank of India. Second, the new government under Narendra Modi is also moving in the right direction on fiscal policy and reforms. AT the same time, Presad and Buiter are both cautious here. Buiter told CNBC India that fiscal management is “better”. He did not say it was good. Presad has said that revenue growth is not as strong as it should be in terms of closing the fiscal gap. He thinks “fundamental problems” remain.
From a markets perspective, a number of noted Asia and emerging markets specialists are saying to overweight India. Christopher Wood at CLSA for example, said “buy on the dips” in November. Presumably that means now is a good time to add to exposure given the EM mini-crisis. Here’s how the Economic Times of India described his view last month:
After rallying over 32 per cent in the year 2014, I would not be surprised if the Indian market faces some near-term underperformance, said Christopher Wood, Equity Strategist at CLSA, on the sidelines of their investor conference in Gurgaon.
“I will use any significant underperformance in India as an opportunity to increase my asset allocation. So on a regional benchmark in an Asia Pacific ex-Japan portfolio, where India is 7 percentage points, I currently have 18 percentage points in India,” he said.
That is 11 percentage points overweight the benchmark, but on any pullback, “I will try and get that up to 21 per cent,” explained Wood, adding that basically “I want to be in position for three times overweight on India.”
The investment cycle has been slowing down in India since 2009, but it looks like that it has bottomed out last year and from a one-two-year perspective, we get evidence that the investment cycle is resuming.
“If that is the case, current valuations in the Indian equities can be supported. If I am wrong and there is no evidence of an investment cycle in the next two years, then India is overvalued and, as I said, I am wrong,” he added.
India is not just a good equity story, but it is also a very good debt story. Global fixed income investors will continue to buy Indian debt because they have confidence in the current central bank leadership, they have confidence in the new Prime Minister, said Wood.
Think of this as qualified support for India because we have already seen a big rally in shares. But a lot of people are optimistic about the Modi – Rajan duo pushing through reforms. Presad told us that Rajan put financial reforms in place on day one, setting the tone for what has come since. But he also says that labour market reforms have been lacking and Modi’s tack of slow and gradual reforms leaves one to wonder whether these efforts will be forthcoming. I think of this in the way I thought of Abenomics, which I said at the beginning of 2012 would be bullish for shares. But, I have since soured on Japan’s long-term prospects given the lack of reform and the consumption tax, which I thought was a major policy error. The problem for India is that a lot of momentum is riding on one person, Narendra Modi. If he fails, the rally in shares will fade as well.
One thing to note is that like Turkey, India could benefit from Russian sanctions. When Putin and Modi met last week, it was all smiles
Wonderful day with President Putin. Our meeting was comprehensive. India’s partnership with Russia is incomparable. pic.twitter.com/YZJiREw5oN
— Narendra Modi (@narendramodi) December 11, 2014
The two put on a big show of allegiance after a period of a more strained relationship. Modi said “the importance of this relationship [with Russia] and its unique place in India’s foreign policy will not change, signing a wealth of trade, economic and military agreements with Russia including the use of tactical nuclear submarines.” Europe is split over sanctions. The Danes, Swedes and French have recently all said they need a carrot as well as a stick in dealing with Putin. It now seems that Germany and Britain are leading the way in keeping pressure on Putin, and ultimately I think this will increase the speed of Russia’s pivot away from Europe and toward Asia, all of which benefits India.
In my view, India stands out as the emerging market with the greatest forward momentum. China, Brazil, Russia and South Africa, the other Brics all have their own problems causing growth to decelerate. When looking across EM then, India stands out.