Is India gearing up for a change of fortune?


Following a prolonged period of high inflation, obstructive government policy and volatile stockmarket returns, fund managers and advisers appear to be warming more to India as the home to world’s second largest population looks to get its house in order.

The nation has been trapped in a political gridlock across a number of key areas, chiefly tax reforms and publicly-funded infrastructure spending. The slow progress in India, infamous for its high levels of bureaucracy, has seen it suffer a contraction in its annual rate of growth.

GDP expansion dropped to a decade low of just 5 per cent for 2012/13 and to 4.8 per cent for the first quarter of 2013, compared with its 15-year average of 7.3 per cent a year.

Its stockmarket returns have been equally haphazard. Over the past three years the MSCI India index has endured a collapse of 9 per cent. During the 12 months of 2011, it plummeted by some 37 per cent but managed to claw back some losses last year, after rising by some 21 per cent.

Interest rates, however, still remain stubbornly high at around 8 per cent, although Charles Stanley Direct investment analyst Rob Morgan believes there are good reasons to be positive.

“A recent moderation in commodity prices is welcome and could allow interest rates to be cut further, helping stimulate growth,” Morgan says. ”On the political front too, things look set to improve. An election must take place within the next year, and could be as early as October. Assuming a decisive result, long-awaited reforms may then take place.”

Inflation, which peaked at more than 10 per cent in 2010, is now receding, falling towards a relatively more benign level of 5 per cent as the recent weakening of global commodities, especially fuel, helped it decline more rapidly than had been anticipated.

Schroders chief economist and strategist Keith Wade says: “Finally, we have become more positive on India, largely as a result of improved inflation dynamics and commodity price movements.

“Inflation has been a persistent issue for India, even in the face of weakening activity, suggesting that supply-side issues are at the heart of the problem.”

Although India’s problems have far from dissipated, the government has had to make significant policy changes, especially in relation to help bringing in more foreign investment, an area that has been beleaguered with red tape.

JP Morgan Indian investment trust manager Rajendra Nair adds: “India had been suffering from political deadlock, which was having an adverse impact on the economy, with knock-on effects for Indian companies. We now feel an economic recovery is made more likely by the measures that have been undertaken thus far.”

An additional concern of the central bank has been the large current account deficit run by India but it is hoped that the easing of energy and the plummet in gold prices will aid in the alleviation of this, providing room for a further rate cut to support activity.

Wade adds: “Though we remain cognisant that the supply constraints remain a barrier to growth, requiring long-term structural reform to remove them, at the margin the prospect of monetary easing has allowed us to revise growth up to 6.1 per cent, from 6 per cent for 2013 and from 6.4 per cent to 6.6 per cent for 2014.”

While there are not always parallels between economic and stockmarket performance, the signs for investors in Indian companies are also encouraging, asserts Nair

“Measures of valuing companies’ shares, such as price-to-earnings ratio and price-to-book value, are below their long-term averages, meaning shares can be bought relatively cheaply, while analysts expect strong growth in company earnings over the coming year,” he says.

”Given the current opportunity to buy growing companies at below-average valuations, we are optimistic that Indian equities have the potential to perform significantly better over the next few years than they have in the recent past.”

Jupiter India fund manager Avinash Vazirani concurs that companies are faring well. Results season is presently underway there and, on the whole, firms have pleasantly surprised investors by controlling costs and maintaining healthy profit margins, he notes.