March 2017

Update on India

Summary

  • Indian reform and macroeconomic improvements are laying the foundation for potential long-term sustainable economic growth.
  • Investors should consider attractive entry points to build a strategic position in Indian equities.

Overview

The victories of PM Modi’s party at the recent state elections have strengthened the government’s mandate to push forward with economic and social reforms. The combination of commitment to structural reforms, a stable macro picture and structural strength underscores why we hold a strategic overweight in Indian equities.

Reform momentum not lost

After pushing forward with the Goods and Service Tax bill and surprising demonetization in late 2016, recent state elections were seen as a test of popularity for the government’s policies. The positive outcome for Modi’s Bharatiya Janata Party in many states strengthens the government’s mandate for economic and social reforms. We expect to see renewed efforts to move forward the reform agenda between now and the 2019 elections with a focus on social and capex spending. Thanks to increased tax revenues, the government may be in a position to do so without significantly increasing the fiscal deficit.

Figure 1: India's accounts have adjusted

Figure 1: India's accounts have adjusted

Source: BlackRock Investment Institute, Thomson Reuters, as of March 2017.

A stable macro picture

Reform efforts have been facilitated by a stable macroeconomic environment, which we expect to see going forward. The fiscal, trade and current account balances have continued to show slow improvements while the outlook for inflation has remained benign. Although the central bank may have paused in its easing cycle, lower rates have provided a supportive regime. A stable outlook for oil is also welcome after the end of year rally given India’s exposure to oil prices. Additionally, policymakers’ focus on consumption and capex may further help support economic activity.

Figure 2: Working age population improving in India

Figure 2: Working age population improving in India

Source: BlackRock Investment Institute, Thomson Reuters, Oxford Economics, as of 03/23/2017.

A structural story

Beyond the short-term picture, we believe the country is going through a secular shift and laying the foundations for long-term sustainable growth. Indeed, in contrast to many of the world’s major economies, India benefits from supportive demographics, low debt levels and high potential productivity growth. Reform efforts in recent years and a lower dependence on the global economy have already helped India become the fastest growing major economy in the world in recent years. A new position that is a game changer, not only for the country, but in our opinion for the world economy. That said, we remain wary of risks that India faces which include stalling in the reform momentum, and external shocks such as higher commodity prices.

Figure 3: India has relatively attractive earnings growth

Figure 3: India has relatively attractive earnings growth

Source: BlackRock, Bloomberg, FactSet, MSCI, Goldman Sachs, as of January 2017. The bars represent the calendar year EPS growth of the MSCI India and Asia-ex Japan indices. 2017 and 2018 are based on consensus estimates. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.


From an equity market perspective, domestic flows continued to be strong while international flows have started to pick up again in 2017, with year-to-date global equity ETP inflows of over $570m.1 Earnings may continue to slowly recover on the back of government spending and a pick-up in private consumption. Following a correction in late 2016, valuations have adjusted somewhat, bringing Indian equities closer to emerging market averages. Investors should consider looking for attractive entry points to build a strategic position in Indian equities.



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Authors
Investment Strategist for ETF Investment Strategy
Analyst for ETF Investment Strategy