A glance at one-year data shows the MSCI India to have climbed 53% since March last year, far outperforming the MSCI China (30%), Brazil (-5%) and laggard Russia (-6%). The aggregate MSCI World is somewhere in between, having registered an 18% rise.
If Saturday’s Union Budget sparked debate, yesterday’s surprise rate cut – by 25bps to 7.5% – unseated many who believed they had already road mapped the economy and its market’s trajectory. The big debate now it seems is should we expect to see further cutting? Certainly, points out Schroders’ emerging market economist Craig Botham, Reserve Bank of India (RBI) Governor Raghuram Rajan has indicated that disinflation was evolving faster than expected.
“Uncertainties around inflation projections were also flagged, with oil prices stabilising and food inflation ever volatile,” says Botham. “Rajan also emphasised a commitment to the inflation target outlined in the budget, of 4% +/-2%. The combination of these factors means an aggressive cutting cycle is unlikely – we see rates being cut no more than an additional 50bps this year.”
However, Jupiter India fund manager Avinash Vazirani disagrees believing the RBI’s actions marks another step on the route that should see the central bank reduce rates by much more than the markets are expecting over the course of the next few quarters. “The rate cut is welcome as it should provide a further boost to the economy just days after India’s Finance Minister Arun Jaitley forecast GDP growth of 8.0 to 8.5% for 2015, and double-digit increases in subsequent years,” he remarks.
“It also signals, in our view, that the RBI is comfortable that inflation remains in control and in line with its view that it will continue falling for the remainder of this year and into the first half of 2016. The bank’s target is to bring the inflation rate to 4% by the end of a two-year period starting in fiscal year 2016-17.”
So who will be the beneficiaries of one, or potentially several, rate cuts? For Vazirani its public sector banks, though he adds that in medium term, a lower interest rate environment is likely to help to revive the investment cycle and boost investment in infrastructure.
For Prashant Khemka, CIO of emerging markets equity at Goldman Sachs Asset Management, further easing bears out a position outlook on Indian equities for the year ahead. This is based on a cyclical recovery evidenced by an improvement in GDP growth this fiscal year and a proactive government whose structural reforms are boosting competitiveness.
“For these reasons we believe consensus views underestimate the upside potential in the Indian equity market and we anticipate both improved valuations and earnings growth,” he says. “We expect margins to return to historical averages and earnings growth to accelerate from the subdued high single-digit levels of the past three years to around 20%, set against a long-term average in the mid-teens.”
Still the best place to be in EM?
So should India still be the emerging market of choice for equity investors in 2015? Austin Forey, manager of JP Morgan Emerging Markets Investment Trust, says he is naturally inclined to be heavily invested there.
He explains: “In our view the outlook for the Indian government is positive, given their attempts to mitigate bureaucracy and implement needed reforms. As the reforms play out, we will see improvement on the status quo, giving a favourable direction of change to the markets.
“In terms of the valuations for Indian equities, multiples on our holdings vary. The Indian market index is on a mid-teens P/E ratio, which is relatively reasonable. On a 10-year view, the country may be one of the fastest growing in emerging markets, providing a solid backdrop for corporate growth.”