India Rises in Eyes of Investors
MUMBAI—India’s stocks and currency have outperformed most large economies in the past six months as renewed confidence in the country’s relative economic and political stability have made it an emerging-market haven in uncertain times.
The firm standing of the ruling Bharatiya Janata Party, good economic fundamentals, a prime minister with an appetite for reform and a potential demographic dividend from a young population make the country an attractive bet, bullish investors say.
It is a turnaround from four years ago, when Morgan Stanley bundled India together with Brazil, Indonesia, South Africa and Turkey as one of the “fragile five,” because of its weak currency and economic fundamentals.
“India seems to be standing out from the emerging-market peer group from a political perspective and to some extent from a developed-market perspective,” said David Cornell, chief investment officer of Ocean Dial, which manages $550 million in India.
The Indian rupee has gained close to 6% this year against the dollar, and the benchmark S&P BSE Sensex index is up 20%. Only China’s currency is outperforming the Indian rupee and Hong Kong’s Hang Seng Index is outdoing the Sensex.
The World Bank predicted that the South Asian nation’s economic growth will accelerate from an estimated 6.8% this year to 7.2% in 2018. Low inflation rates position the central bank to possibly cut interest rates again this year. Other emerging markets such as Russia and Brazil last year suffered negative growth, and the pace of growth of China has slowed. India is less dependent on exports than most major countries so is less vulnerable to trade uncertainty.
The positive outlook comes despite some recent setbacks. Prime Minister Narendra Modi’s move last year to cancel 86% of currency in circulation in a bid to tackle corruption and tax evasion hurt economic expansion in the short run. India’s gross domestic product expansion fell from first in the world for large economies to second behind China over the last two quarters as the lack of cash and confusion about the goods-and-services tax forced consumers and companies to spend less.
Some analysts say Indian shares look expensive. Stocks on India’s benchmark BSE Sensex are trading a 17-year high P/E ratio of 23 times the expected profits for this fiscal year.
But Indian stocks and bonds attracted about $27 billion net from foreign investors this year through August. Demand for offshore rupee-denominated bonds has been so high that regulators had to shut down new issues. Foreign direct investment hit a high of $60 billion for the financial year that ended on March 31.
Some optimists are hoping that India is finally emerging from China’s shadow. India’s long-term stock performance suggests it is pulling away: the BSE Sensex is up more than 80% in the last five years, while China’s Shanghai Composite is up around 66%, Brazil’s Bovespa less than 30% and Russia’s RTS has fallen.
One part of the positive story is the “political stability with the Modi government coming into power and also getting footholds in the states so they could turn on the reform agenda,” said Stefan Grünwald, a fixed-income expert at Raiffeisen Bank International AG .
Mr. Modi’s tax-collection push has begun to yield results. After the currency move, direct tax revenue increased 19.1% from a year earlier to 1.9 trillion rupees ($30 billion) in April to July.
The rollout of a long-delayed goods and services tax this year is also expected to increase compliance and eventually boost growth.
“The government’s ability to collect taxes in a much more efficient manner, and the implementation of GST over the long run are going to be massively positive for the economy,” said Dhiraj Bajaj, fund manager and head of Asia fixed income for Lombard Odier.
The market is pricing in the expectation that Mr. Modi’s party has enough support to push through more change and win the 2019 general election, “and that will help him to legislate more reform which will in turn lead to a stronger economy,” said Mr. Cornell of Ocean Dial.
While money has flowed into emerging markets overall over the past six months, India has gained the most, according to estimates from fund-tracker EPFR Global. Over the year to July 31, almost $17 billion came into India funds, compared with $7.6 billion to China funds and $6 billion to Brazil funds.
India bulls say that though shares may be expensive now, they are attractive if you look at it as a long-term bet on the country’s vast young population, which will be consuming more and pushing up earnings for decades.
“It is coming of age, and the younger demographics that India has to offer make it an attractive investment destination,” said Vikas Gattani, founder and CEO of Progress Opportunities Fund at Progress Asia Capital.
A recent selloff showed how India has become a shelter. When mutual-fund investors pulled money from emerging market funds in August, India funds weren’t badly hit, according to data from EPFR Global.
More than $20 billion flowed out of China funds in the three weeks beginning Aug. 2, while $14 billion flowed into funds dedicated to India during the same period.
“Compared to Brazil or Russia, India is a bit of a fundamental turnaround story,” Mr. Grünwald said.
By Corinne Abrams and Debiprasad Nayak