GDP growth has continued to moderate downwards over 2012 and the stock markets have oscillated widely as sentiment has turned from fear to greed.
More of the same…
But what can we expect for 2013 and will one of the best performing stock markets in 2012 repeat the feat next year?
On the face of it, it is rather odd that Indian stocks have performed so well in 2012. After all it is corporate earnings, and the outlook of corporate earnings that drive stock markets. This year has been one of painful downgrades of analysts’ expectations of earnings. This is due to (among other things) the unprecedented monetary tightening by India’s central bank as inflation has remained stubbornly above its comfort zone.
The result has been a significant slowdown in GDP growth, led by a sizable fall in investment. But of course the market is forward looking, and policy tightening will likely turn into policy loosening next year, albeit on a gradual basis.
Looking at the equity market flows this year, foreign investors have ploughed $20bn into India (up to mid-December). They have increased their exposure to perceived higher-risk markets in the hunt for better returns.
While there is little doubt that these flows are partly due to the aggressive monetary policies in the developed economies, and that India offers an attractive valuation, growth and stability compared to these developed markets, we believe the primary driver of these flows has been domestic in nature. By domestic we mean it is Indian factors that have driven these inflows, and by that we believe it is the reinvigorated reform agenda that is paramount.
It is our belief that it is the potential for further reforms which will dictate if India will do well in 2013. Since the about-turn of the Congress Party in mid-September to a more reform-oriented pro-growth agenda, there has been some significant measures announced:
- Diesel prices have been hiked (helping the government’s fiscal deficit);
- The State Electricity Boards have begun to restructure – they have been a potentially huge source of non-performing loans to the banking sector;
- Foreign direct investment has been allowed into multi-brand retail.
Each of these measures has very positive long-term implications for the Indian economy. But by themselves they are not enough, and there are other potentially far-reaching Bills and proposals that are currently waiting to see the light of day.
Where we are perhaps a little more positive than most is in our belief that this government might well surprise on this front. The fact that the government pushed through both houses of Parliament the foreign direct investment in multi-brand retail Bill, in the face of intense opposition, suggests to us that there is real strength and resolve in these matters. With an election due in 2014, we expect a drip-feed of positive news on this front to ensure that the foreign liquidity taps are kept turned on.
…just better
Turning to the economy, we see 2013 as a year of gradual improvement in both GDP growth and inflation moderation.
The recent policy initiatives by the government and further reforms should help boost business sentiment and improve the investment climate. Inflation in prior cycles in India has usually fallen in the face of a slowdown in GDP growth, and we expect this time will be no different. Indeed we are currently seeing signs of wholesale price inflation easing. If inflation eases further, it will give the Reserve Bank of India the wiggle room needed to change bias from an inflation-fighting to a pro-growth agenda, with obvious positive implications for corporate earnings.
So, all-in-all, we expect 2013 to be a better year than 2012. With India’s macro picture expected to turn for the better, and the government playing its part, we have a fairly positive outlook to the first few months of 2013.
Of course, external factors could easily derail this positive scenario – the US fiscal cliff, continued eurozone worries or even heightened geo-political risks in Asia.
But let us not forget that India is Asia’s most domestically-focused economy with perhaps the best long-term structural growth drivers on the globe. Add to that the quality of corporate India being world class and this is an investment story that deserves renewed attention.
