In the battle of emerging markets this year it has surprisingly been Brazil and Russia that have come out on top. But will the star of India shine brighter for longer?
Indian markets rallied hard after Prime Minister Narendra Modi came into office on a wave of euphoria. There was then a slight dip as he didn’t meet the unrealistic expectations of both significant and immediate reforms.
But overall the country has enormous potential. Unlike many developed nations demographics are on its side with around half of the population under the age of 25. There are real growth opportunities in many sectors, such as banking where the number of people with a bank account remains extremely low. We are now also starting to see some of the expected reforms from Modi, starting with the Goods and Services Tax. This new tax is considered a game changer by many in helping to create a common Indian market and removing all the existing indirect taxes levied by individual states.
The fragmented regions within India, which the new tax system is trying to address, are an example of the scale of the challenges faced in reforming India. This will not be an overnight process and is complicated further by the sheer size of the population. We should expect to see a steady drip of reforms rather than just a couple of headline grabbers.
After the unexpected rallies in Brazil and Russia investors are starting to look at emerging markets as a whole again. We expect attention to focus on India once the value rally elsewhere fades, which we believe is certain to happen as Brazil simply doesn’t have the fundamentals to sustain this year’s market performance.
Investors will then start to look for higher quality exposure. China arguably has a more immediate-term appeal but it’s fairly well documented that it faces a range of negative issues, while Russia and parts of the Middle East and Africa also face political issues as well as a reliance on commodities for future growth.
In our mind India is definitely emerging once again as the bright spot of emerging markets.
Sheldon MacDonald is deputy CIO at Architas