Within India, the rupee's stability has reassured investors and corporates alike, the latter stressing the benefits of operating in an environment of a settled currency, a critical prerequisite for a recovery in confidence, according to David Cornell, chief investment officer of India investment specialist Ocean Dial Asset Management.
The good and the bad
He added: “Behind the currency's better performance is a sharply reduced current account deficit, downward momentum in inflation, and a fiscal deficit which ended financial year 2014 better than forecast and well ahead of the market's expectations.”
Despite these positive signs, he still remains wary of the sustainability of these numbers.
He said: “While we are greatly encouraged by the market's recovery, earnings must also recover for stocks to continue their upward march. The multiple re-rating will not go on indefinitely. In truth, though the economy seems to have bottomed, it remains in the doldrums following seven consecutive quarters of growth sub 5%.”
The Indian economy also remains on hold to some extent due to the impending election. Cornell believes its outcome will define the market’s next leg. “All corporate decisions are pending, awaiting the outcome and the implications thereof.”
Unfulfilled potential
One sector which Cornell highlights as vitally important is agriculture, which accounts for 16% of GDP. While India prides itself on now being self-sufficient in staple grains, the challenge of reducing high food inflation and accommodating improvements in dietary habits will need to be met through corporate investment and expansion.
“Realising India's full potential presents both major opportunities and serious challenges, perhaps nowhere more so than in agriculture. This is a sector which offers a curiously accurate reflection of the country's wider economic story,” according to Cornell. “Huge strides continue to be made in agriculture, in spite of the government, but there remains an urgent requirement for reform in order to keep pace with growth and changes in demand.”
From an investment point of view, he foresees agriculture providing a wealth of opportunities, stemming from a combination of modernisation, reform and the well-known Indian propensity for entrepreneurial innovation.”
