India – Second-most attractive equity market in the world in 2019
India has been voted the second-most attractive emerging market for equities in 2019, according to a survey conducted by Bloomberg.
The survey asked 30 top global equity funds to rate emerging markets in their order of investment preference. India was ranked #2 amongst the top 11 emerging economies in the world.
Global funds that participated in the survey include Fidelity, Pinebridge, Neuberger Berman, Amundi, Investec, Bank of Singapore, Krung Thai Bank, MUFG, Fujitomi among others.
As per these investors, the broad narrative for 2019 is that money in equities is going to flow from developed markets to emerging markets. There are multiple possible reasons for this anticipated trend.
Factors such as global slowing down, a volatile Brexit, Government shutdown in the US, US-China trade war etc. have pushed the Federal Reserve to reduce its Fed Rate hike estimate for 2019 from the 3 hikes it predicted earlier. Federal fund futures are presently pricing in 0-1 hikes in 2019.
This means that the debt burden for developing economies, which ramped up their dollar borrowings in recent years, is going to be lesser than expected, which gives a boost to the attractiveness of their equity markets.
In Eurozone and Japan, there are no changes expected in the interest rates in 2019, as the European Central Bank gradually withdraws its quantitative easing programs and Japan continues to battle with inflation stubborn around nil.
The US-China Trade War is expected to have an adverse impact on the Chinese economy, which in turn will adversely impact the economies of Asian and emerging economies as their supply chains are closely linked with Chinese industry. However, economists are of the opinion that the trade-war is expected to be resolved within 2019, which in turn makes emerging economies more attractive than was earlier expected.
The year 2018 was very volatile for oil prices. Oil prices rose to 4-year highs in October 2018, before slumping by 30-40% by December 2018. This is attributed to the following factors-
1. Rising demand for oil from India and China was not enough to offset falling demand from other emerging economies amid a global slowdown and a general shift towards non-conventional sources of energy
2. Global oversupply and reduced power of OPEC as a price-setter as-
a. US became the #1 crude oil producer in the world with its shale reserves
b. Qatar left OPEC in 2018, to shift its economy away from oil and focus more on natural gas
c. Sanctions on Iran and Venezuela
To combat the decline in prices, producers such as Saudi Arabia and Russia have announced in January 2019 that they are now cutting supply to curb the oversupply in the market. Oil prices in 2019 are expected to be moderate, which is a reason to cheer for emerging markets, especially India for whom oil forms a substantial portion of its imports.
The main reason that kept India from getting the numero uno position and overtaking Brazil is the political uncertainty due to upcoming elections.
The main reason that enabled India to overtake all the other developing nations to clinch the second position is the expected earnings revival in 2019.
As per the flash reports released by Kotak Institutional Equities every week, India is projected to have the highest growth in the average earnings per share on an index level (NIFTY for India) amongst all large developed and emerging economies in 2019.
Main reasons for this are –
1. Low inflation – The retail (headline) inflation has been around 2% for the last few months which is at the lower end of the RBI’s target inflation (2-6%). Core inflation which was been sticky at 6% for a while, reduced to 5.4% in January 2019, and is expected to go down further in 2019.
2. Potential rate cuts by RBI – In February 2019, RBI cut the repo rate by 25 basis points to 6.25% and hinted that there is room for more cuts in 2019
3. Continued strong GDP growth – As per the UN, India’s GDP is expected to grow at 7.4% in this fiscal, and 7.6% in 2019-20
4. Mild rupee volatility – A less aggressive Federal Reserve and related weakening dollar, moderate oil prices, lower inflation etc. can be attributed for the expectation that rupee will be fairly stable this year. Political factors may cause mild turbulence.
The reduced interest rates shall increase the spending power of the people causing mild inflation, which shall continue to be well within RBI’s target range. Lower cost of borrowings also means that farmers, corporates etc. can borrow more and produce more, enhancing the country’s GDP. As corporate earnings go up, so shall stock prices. This attracts foreign investors which increases the demand for the rupee, and the currency appreciates. This appreciation is expected to be offset by any depreciation that may occur due to increased oil prices or political turbulence.
Hence, when tied together, multiple factors are working hand-in-hand to paint a rosy canvas for Indian equities in 2019.
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