Britain's decision to leave the European Union (EU) was a macro event that came as a surprise to global financial markets.
In the aftermath of ‘Brexit’, our expectation is that major central banks are likely to maintain a stance of accommodative monetary policies over the short- to medium-term, while an interest rate hike in the U.S. now seems unlikely, especially before the end of 2016.
Our on-the-ground portfolio managers at Birla Sun Life Asset Management Company Limited posit that ‘Brexit’ will have minimal impact on India. This has so far proven to be true, evidenced by the Indian market’s outperformance since the news broke on June 24, 2016. While there may be short-term volatility, the fundamentals of the Indian economy remain intact, and it is important to note that India continues to be one of the best positioned investment opportunities within the emerging markets, as strong domestic consumption drives both growth and stock-market performance.
The India investment story is a long-term one, which has not be disrupted by events in the UK and Europe.
In our view, the following factors position India for further growth:
- Above-average monsoon season: After two successive years of drought, this year’s rainy season is expected to be well above normal and will be a major boon for the rural economy with the potential to push India’s GDP growth rate above 8%1
- Strong forex reserves: The Reserve Bank of India is sitting on forex reserves to the tune of US$360 billion, enabling the Indian economy to manage external shocks, including a global macro event such as ‘Brexit’2
- Goods and services tax (GST): This is a major reform proposal of the Narendra Modi administration. Several regional parties have registered their support for the initiative and state finance ministers have given their approval, hence the bill is expected to be passed within the next several months. When fully implemented, GST is forecasted to add as much as 1% to GDP, through enhanced economic efficiency2
- 7th Pay Commission boost: The Cabinet has approved and recommended an approximately 24% overall increase in salaries, allowances and pensions. This increment is likely to be implemented in July, 2016 and will give a huge boost to domestic consumption by putting more money in the hands of the urban middle-class2
- Possibility of additional rate cut: The UK’s separation from the EU is expected to soften global growth, particularly in developed markets. As a result, Excel Investment Counsel Inc. (“EIC”) expects major central banks, including India to be more accommodative in their monetary policies and this could mean further interest rate cuts in the near-term
- Record level of investor flows: India continues to be a top investment destination. Net foreign direct investment (FDI) inflows increased to an all-time high of US$36bn in the fiscal year ending March, 2016, and is expected to surpass US$60 billion by the end of the fiscal year, 20172
- Normalizing commodity prices: While oil prices have recovered to more normal prices, lower global growth -- brought on by ‘Brexit’ -- is expected to weigh on commodities going forward. This bodes well for net importer nations such as India
- Attractive valuations: Indian equities currently sport a price-to-earnings growth ratio (PEG) of 1.02 versus 2.03 and 1.56 for U.S. and Canadian equities, respectively. This lower PEG ratio indicates that Indian equities are undervalued compared to anticipated earnings growth, especially when compared to developed economies3
Beyond the near-term volatility, EIC believes the long-term attractiveness of the Indian market remains intact. Indian equities’ relative prospects have actually improved under the current macro environment. While developed markets face greater uncertainty and a lower growth outlook, emerging markets are on a positive trajectory. EIC strongly advise investors with long-term investment horizons to capitalize on any opportunities that arise from the current market volatility to increase their allocation to Indian equities.
1 Bloomberg Business, Good Rain Forecast for Parched India Lifts Growth Prospects, May 8, 2016.
2 Birla Sun Life Asset Management Company Limited.
3 Bloomberg data, as at June 28, 2016.
Picture Courtesy: www.pmindia.gov.in