This is an extract from a post that appeared in the India Markets Observer 2018, an online publication that brings together experts who discuss these challenges in the fund industry and investing insights and various perspectives.
Anand Radhakrishnan, CIO at Franklin Equity, Franklin Templeton Investments – India, believes these are significant factors which will likely boost economic growth going forward.
- A concurrent recovery in domestic consumption (auto sales, sales growth in consumer staple companies, imports of non-oil and non-gold capital goods) and exports (global growth recovery). Rural demand recovery will be a significant contributor to domestic consumption demand.
- Recovery in rural demand could be led by populist measures undertaken by the government in run-up to general elections in 2019 (MSP) a gradual recovery in non-agricultural segment of rural economy from demonetization/GST related disruptions and expectations of a third consecutive year of good monsoons. In the backdrop of negative output gap, this cumulative surge in demand should help improve capacity utilization levels which in turn could bode well for earnings growth and lead to a recovery in private capex in 2018.
- Case for revival in private capex stems from improving corporate earnings, better lending capability of public sector banks post recapitalization and favorable market for equity issuances. While the possibility of pre-election populist measures stoking inflation hovers, we expect the government to focus on bringing about amendments and enhancements to existing policy reforms already undertaken rather than pursue new structural reforms.
- Thrust on rural expenditure will continue to remain key with fiscal allocation to affordable housing, rural roads and electrification. Increased efforts are expected to be taken to transfer power subsidy through Direct Benefit Transfer (DBT) mechanism. Healthy budgetary allocation to road projects should continue in the coming year. In case of relaxation of fiscal deficit target, we may see incremental allocation being channelized to rural schemes.
Ritesh Jain, CIO at BNP Paribas Asset Management India Pvt Ltd, believes that the key themes for this year are:
- Macro variables may not improve from here, as seen in CY2014 - H12017
- Pollution clampdown will gather pace in China and India aiding select domestic sectors
- Pickup in discretionary consumption led by urbanisation
- Doubling of farm income to aid rural consumption
- Financialisation to gather pace - domestic flows to stay robust
- Earnings may have finally bottomed out
Consumer price inflation is likely to average around 5% in financial year (FY) 2019, up from an estimated 3.7% in FY 2018. Our base case remains for a rate hike in the next 6-9 months, possibly in Q1 FY 19. Nevertheless, we are not expecting an aggressive hiking cycle as the RBI has largely held its ground, and refrained from any significant easing as inflation fell.
We expect 10-year G-Sec bond yields to slowly inch upwards in the next 6-9 months from 7.75-8.0% on account of rising inflation and interest rates.
Earnings may have finally bottomed out but dispersion in earnings will continue, we see headline earnings growth likely to return, given; (a) sequential improvement in earnings (b) the return of inflation; and (c) improved demand from favourable policy and tax changes i.e. consumption push in domestic economy, better global growth and stressed asset resolution.
From the perspective of capital markets and investors, since higher inflation is negative for interest rates, fixed income as an asset class is expected to continue its underperformance and at the same time equities should continue to do well because the early stages of inflation tend to be good for corporate earnings. We are currently in this stage where inflation has a positive impact on corporate earnings. For this reason, we are bullish on equities.
In our view the macro variables - current account deficit, inflation, fiscal deficit and oil price - which behaved well in the last three years are exhibiting mean reversion and micros (read earnings) are likely to do well.
In this context we believe the year 2018 could be the year of the ‘U-turns’ for both macro and micros.
Tushar Pradhan, CIO at HSBC Global Asset Management India, comments in key factors.
- Earnings growth in India is likely to remain strong. Valuations remain in higher than historical range vis-à-vis earnings. The expected increase in RoE’s following margin expansion and lower rates of interest signal a stable environment in spite of the ostensible expensive multiple on earnings. P/B multiples however are well within the long-term averages and the market may be pricing in a much stronger recovery than in the estimates so far.
- Earnings recovery will bring earnings multiples down, though not in line with long term averages.
- Market returns will stay positive though will not touch the levels seen in 2017.
- Interest rates in India could be range bound with short spurts of easing on the back of news flow and vice versa. We do not expect them to rise substantially in the near future, nor do we anticipate a steep fall.
- Increasing domestic and foreign participation may provide opportunities for higher than average multiples to sustain and as a result, given a penchant for volatility investors could choose to remain invested in the equity asset class as it may yet provide the highest returns across available asset classes this year.
- Market volatility will be driven by political and geopolitical events as and when they occur but do not expect fundamentals to deteriorate very significantly. Whether this leads to higher market levels is a moot point given current market valuations.
- Intermediate bonds are likely to remain a fairly attractive asset class on a relative basis.
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