Second quarter GDP growth of 5.7% was up sharply from 4.6% in the first quarter, beating an optimistic consensus forecast of 5.5%.
Geoff Lewis, Global Market Strategist, and Tai Hui, Chief Market Strategist Asia, of J.P. Morgan Funds look at the broader picture and share their views on the investment implications.
- The BJP came to power just as the Indian economy was in the process of bottoming. So regardless of the change in government, the macro economic data for India was expected to take a turn for the better. Thus investors eagerly awaited the 2Q GDP data for confirmation that India's slow patch was over. This was duly provided by last Friday's GDP release, which registered the best annual growth since 1Q 2012.
- The resilience of the Indian stock market after the May election, which has continued to outperform the Asia Pacific region, appears to be warranted. The 2Q GDP numbers suggests that a relatively strong cyclical rebound has begun in an India that has yet to feel the benefits of the new government's policies. All sectors showed improvement in the second quarter.
- While investors‘ lofty expectations on the pace and extent of Modi’s reforms in his first year of office are inevitably being scaled back somewhat, we never saw reform as being the key driver for growth in the near term. There is unlikely to be a big impact on India‘s potential supply side growth much before FY16, in our view. So while the 2Q GDP figures have provided an encouraging start for the new government and India’s cyclical recovery, the path ahead may yet prove a little bumpy at first, rather than a silky smooth return to high growth.
- The Indian economy today still has many challenges to face and it is early days to gauge the success of “Modinomics,” though we remain optimistic on that score. Reviving an economy that has been suffering from a long period of “stagflation” is never an easy task. For India, the transition from stagflation back to a path of sustained growth and low inflation will above all depend on improving productivity performance. This is where government policies can help a lot over the medium term, by focusing on supply side issues rather than stimulating aggregate demand. But it will also require improvements from Indian companies in the form of higher returns on investment. RoEs have fallen significantly in recent years, and not all for cyclical reasons.
- Investing in India under Modi is not about the opportunity for a quick trade. Rather, it is about the strong secular growth case for India that demands a larger strategic asset allocation to Indian equities. We are seeing signs of such an asset reallocation in the return of foreign equity portfolio flows to India and, importantly, in a pickup in domestic net flows into equity mutual funds recently. After many months of absence, we feel the latter has the potential to become the catalyst for a further stock market re-rating.
- With per capita GDP in India still much lower than in many other emerging markets, we see the country as still being in the “catch-up” phase of growth, where typically rapid growth has been easier to achieve. A long-drawn out cyclical bottoming in the Indian economy has finally come to an end.
- With improving consumer and business confidence (Keynes' “animal spirits”), India's growth rate in coming quarters should benefit from an unlocking of pent-up demand, especially for capex plans that were shelved temporarily or postponed because of policy uncertainty.
The important thing for investors is that the Indian economy is now heading in the right direction, just as the train of “Modinomics” is leaving the station. Today's 2Q GDP numbers are highly encouraging in this respect, although investors would also be wise not to exaggerate the significance of one set of data points for the longer term outlook.
