If you have gone through my Global Economy Forecast for the year 2014, you may remember a paragraph that I had forecasted about India.
Here it is for those who did not –
India holds huge potential
Measured in 12-month rolling terms the current account deficits widened in all the countries except in India, in the four quarters to September 2013. India’s deficit narrowed a percentage point to 4.35% in the July-September 2013 quarter, due to official curbs on gold imports. The Indian economy and its financial markets could see some positive surprises in 2014. Ongoing strengths, in terms of solid economic growth potential, strong public and consumer finances, rich natural resources and favorable demographic trends that have helped them over the past several years could gain new traction. For the long-term fundamental investors, I believe longer-term developments that look likely to gain traction in 2014 could drive solid growth potential in India.
All and more that I did mention there is soon coming true. Emerging economies have seen a huge downfall last month but the only one that did not, but in-fact rose was none other than – India. Earlier in the last weeks of Feb, Indian stock markets had seen a sharp correction. I had advised a buy in Nifty futures at 5950 levels with a final target of 6850. Today Nifty April futures have hit 6799.65 – a breath away from the lofty new high. Indian stock markets have been on a sharp rise making new highs regularly since the last 10 trading sessions.
India’s benchmark stock index rose to a record for a sixth day as international investors extended Asia’s largest equity-market inflows. The S&P BSE Sensex added 0.5% to 22,514.90 at the close on Wednesday. The gauge climbed 5.5% in the previous quarter, beating stocks in Brazil, Russia and China, as easing inflation and forecasts for a change in government after polls starting next week lure inflows. Foreigners bought a combined $222.9 million of shares on April 1 and March 31, according to data from exchanges. That adds to inflows of $3.6 billion into local equities this year through March 27.
Emerging-market stocks rose for a ninth day after reports showing an increase in U.S. payrolls and factory orders added to confidence the global economy is recovering. The MSCI Emerging Markets Index added 0.4 percent to 1,004.72 at 12:30 p.m. in New York, set for the longest rally in 15 months. Equities gained after a private report showed American companies boosted payrolls in March by the most in three months, adding to evidence the job market is recovering, while growth in factory orders beat economists’ estimates.
The Reserve Bank of India on Tuesday kept the benchmark rate at 8% as retail inflation eased to a two-year low and the government forecast smaller budget and current-account shortfalls. There was no surprise from the RBI’s monetary policy review yesterday and dovish comments from the U.S. Federal Reserve are also boosting the currency.
India’s rupee rose to an eight-month high after the central bank left interest rates unchanged and data showed a pickup in capital inflows.
The currency strengthened 0.4 percent from its March 28 close to 59.68 per dollar as of 10:27 a.m. in Mumbai, according to data compiled by Bloomberg. It touched 59.61, the highest since July. The market was shut on March 31 for a local holiday and there was no trade Monday as banks closed their accounts following the end of the financial year.
The rupee gained 3.2% in the first quarter, its best performance since 2012, as global funds pumped $9.3 billion into Indian shares and bonds. Some $558 million was added on March 27, the latest exchange data show. India’s consumer prices increased 8.1 percent from a year earlier in February, the smallest increase since January 2012, official data show.
The rupee’s recent rally is set to reverse course later this year as upbeat sentiment ahead of a general election wears off and economic growth remains slow, a Reuters poll found. Still, the rupee will not lose much and is expected to trade at around 60.61 to the U.S. dollar in a month before weakening further to 62 in a year, Thursday’s poll of 30 currency strategists showed.
Expectations that the pro-business opposition Bharatiya Janata Party (BJP) will win the election and, in turn, attract more investment is in part responsible for the benchmark BSE Sensex hitting a new lifetime high of 22,620.65 on Thursday. The rupee reversed last year’s losses of more than 11 percent against the U.S. dollar and has gained over 3 percent so far this year. It hit an eight-month high of 59.57 to the U.S. dollar on Wednesday.
That is well above the near-18-year low of 68.80 that it hit last August when a sell-off by investors battered the rupee along with other emerging market currencies. That sell-off was mostly in reaction to the U.S. Federal Reserve’s plan to taper its massive stimulus programme, which made investors dump riskier assets, including the rupee, combined with a slowdown in India’s economic growth to a four-year low. While investor sentiment has since improved, strategists do not expect the rupee’s strength to continue.
“The kind of Rupee appreciation we are seeing today is more because of foreign institutional investment flows which are fairly gung-ho because of elections and what they perceive would be a strong, favorable government inclined towards economic growth,” said Madan Sabnavis, chief economist at CARE Ratings. “Right up until the time when the election results come out, things will remain positive. Then, I think we will probably get back to reality and see what kind of a government comes in and how differently are they able to do things.”
Indeed, the new government will be faced with the same challenges as the current one – high inflation and borrowing rates, weak industrial production and muted demand. The ruling Congress-led coalition government has been under severe criticism for its inaction over pursuing key reforms, which has hurt economic growth and investor sentiment.
Traders have also speculated that the Reserve Bank of India has been buying dollars recently to shore up its foreign exchange reserves and possibly capping the currency’s strength. RBI Governor Raghuram Rajan told a TV channel on Wednesday that a “substantial” strengthening in the rupee to 45 or 50 per dollar could hit exports, but added that the central bank was fine with a “certain amount of leeway” in the currency.
The Fed will likely raise its key interest rate in the second half of 2015, according to top Wall Street economists polled by Reuters. That will also help the dollar gain and, in turn, push the rupee lower. “Over time, the Fed’s policy shift is supportive of the dollar and that’s the most important reason why we see some weakness in the rupee,” said Nick Bennenbroeck, head of currency strategy at Wells Fargo Securities.
Overall, emerging markets have taken a beating so far in 2014, but analysts are pointing to one so-called BRIC market as especially attractive: India. Analysts who watch the BRIC markets—Brazil, Russia, India and China—say India’s near-term future is promising. India’s equity market is up 6 percent this year, while the emerging market index is down about a percent in the same period.
India’s rise comes despite economic hiccups on the subcontinent. After enjoying speedy growth over the past decade, India’s economy hit the brakes in 2012 with rising inflation, a growing current account deficit and a weakening rupee, which lost almost 13 percent against the dollar in 2013.
The growth of Asia’s third-largest economy has slowed to 4.7 percent—far below the double-digit growth it enjoyed in recent years. As a result, India has been dubbed a “fragile five,” a term used to identify five economies—India, Turkey, Brazil, Indonesia and South Africa—that are seen as too dependent on foreign capital.
But despite the recent economic slowdown, there’s optimism for a bright future ahead.
The biggest driver of bullishness in India is the hope for a new government there. India is set to elect a new prime minister in April—results will be announced on May 16. Investors and the business world are betting on a more business friendly party—the center-right Bharatiya Janata Party (BJP) led by Narendra Modi—to win. Modi is known for welcoming foreign investment, and recent polls show the BJP positioned strongly in the race.
So far this year foreign investors have poured $2 billion into Indian equities, reversing the recent outflow trend.
“Their [BJP] agenda is basically to implement a wide-ranging program of economic reforms that could significantly untap growth potential for the country,” said Andres Garcia-Amaya, global market strategist at JPMorgan. “Overall India has interesting valuations, prospects for faster economic growth led by better monetary and fiscal policies.”
Garcia-Amaya sees the potential for earnings growth in India as very appealing; He projects 12 to 16 percent growth for the next year or two. “If you look at year-to-date, India is one of the strongest so far, not only in emerging markets, but throughout the world,” he said.
Even aside from political issues in BRIC countries, India is the best bet, Garcia-Amaya says. Unlike Russia and Brazil—both net exporters of commodities— India is a net importer. That means that when China’s economy slows, as it has been recently, it pushes commodities prices down, something that benefits India but hurts Russia and Brazil.
And when it comes to China, whose valuations are more attractive than India’s: “I still think there’s more to come from China’s slowdown in credit. I don’t necessarily expect a hard landing for China, but I do expect a lot of front-page news that are not so positive,” he said.
Bill Witherell, Cumberland Advisors chief global economist and portfolio manager, also has India at the top of his BRIC list.
“India has a very good future. Demographics are better than in most countries. Workforce age is increasing. It has a middle class that over the next five years will probably double in size,” Witherell said. “This year and next year we see growth a little bit below 5 percent, but then picking up in 2016 through 2020 to 6-plus percent.”
In March, Cumberland Advisors and Goldman Sachs both upgraded India to “overweight.”
Analysts’ upbeat views on India come during a stretch where emerging-market exchange-traded funds—while down overall for the year—have been on a tear. As of Tuesday, the PowerShares India Portfolio ETF was up 7 percent over a nine-day stretch.
In spite of India’s troubles over the past few years, more recent economic data indicate that India is heading in the right direction.
India’s inflation, measured by the wholesale price index, dropped to 4.6 percent from 5.05 percent. The rupee has stabilized, gaining almost 3 percent against the dollar this year.
India’s current account deficit, a key concern among investors, is shrinking. From October through December, India’s CAD narrowed to $4.2 billion—or 0.9 percent of GDP—from $5.2 billion—or 1.2 percent of the GDP—in the previous quarter. The taming of the current account deficit is attributed mainly to the government’s restrictions on gold imports and central bank measures.
The new governor of the Reserve Bank of India, Raghuram Rajan, who took office in September, has also restored investors’ confidence in India.
“He is one the world’s top academic economists,” said Arun Sundararajan, an economist at New York University’s Stern School of Business and an expert on India. “In my view, there’s a lot of optimism in putting him in charge because it means we will start getting world-class thinking on fiscal and monetary policy.”
So what if the BJP doesn’t win this month’s elections?
“This is an economy that should be growing at 6 percent. All they need is to make some reforms to allow them to grow at the pace that they should be growing,” JPMorgan’s Garcia-Amaya said. “Even if the BJP doesn’t win, it seems that finally politicians from both sides of the aisle are starting to understand what they need to do to unleash that potential.”
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