There’s no such thing as a guarantee (certainly no sovereign bonds are risk-free) and India does still have weaknesses. Its 2011 performance has been described as the most disappointing of all the BRIC countries by Goldman Sachs’ Jim O’Neill who coined the BRIC acronym in the first place.
He still likes the combination of all four – describing them along with other rising stars as the “growth engine of the world economy, today and in the future” – though he has particular issues with India and its poor productivity, a lack of foreign investment and its own slow pace of reform.
Some of these, however, are being broken down with foreign investors, for example, now being encouraged to invest in its domestic stock markets with the Securities and Exchange Board and Reserve Bank of India expected to give detailed guidelines soon.
This will be a boost for its main index, the Sensex, which fell by 25% last year, its second worse annual performance on record.
Opening up to overseas investors will increase India’s shareholder base, encourage fund flows, reduce market volatility and help to strengthen a currency that fell by nearly one-fifth against the dollar during the 2011 calendar year. The strength or otherwise of the rupee is an ongoing concern.
Other positive changes that are more widely cited include:
- a burgeoning young workforce in a growing population that is expected to overtake that of China by 2025;
- agricultural production is at a record high;
- rising consumer expenditure is from earnings not borrowings;
- inflation falling by as much as 2.5% by the end of the first quarter, down to 6.5%;
- interest rates to drop by 2% by year-end;
- economic growth of 7.5% for 2012 forecast by the IMF;
- Moody’s has upgraded its long-term government bonds from Ba1 to Baa3 into investment grade territory, its first upgrade since 2004.
Fund groups are also entering, or re-emphasising, the Indian equity fund market with Baring Asset Management planning a Dublin-based proposition for Ajay Argal (just to complete the global picture for this UK firm, Argal is based in Hong Kong).
India is also fairly well protected from the chaos in Europe – which is currently the number one reason for any investment-related problem – as it is a very inward-looking country with less than 20% of its GDP coming from exports.
This is not an argument for piling into India as there are still plenty of weaknesses – for instance, a top-down look still reveals a governance that is so incredibly bureaucratic and a political structure, locally and nationally, that has been described as “alternating between populism and paralysis”.
It is, however, the positive side of an argument that hopefully shows enough to encourage investors to take a closer look for themselves.
For a more detailed outlook on India please read the Equities article that will appear in February’s issue of Portfolio Adviser.
