India's domestic story stands out amid mixed Asian picture
Some readers will be aware of our thoughts on China and its credit-fuelled investment bubble. But it’s not all doom-and-gloom in Asia, with India a case in point.
India’s demonetisation policy introduced in the fourth quarter of last year has clearly, and will continue to, cause a temporary slowdown in the economy.
India’s demonetisation entailed scrapping all 500 and 1000 rupee notes, approximately 86% of all banknotes in circulation. The measure was aimed at curbing the black market.
However, we don’t think it will cause any long-term damage to our thesis for the country. We see the slowdown very much as cyclical and recent company visits in India have confirmed that the economy is starting to normalise.
On the flip side, whether it achieves Modi’s goals to root out corruption and stem black money accumulation and bring India’s shadow economy (estimated by the World Bank at close to 25% of GDP) into the formal economy remains to be seen. At the margin it may, which should help direct tax collection which remains woefully low and is a serious impediment to much-needed investment in infrastructure, education and healthcare.
Overall, we view demonetisation, in the stockmarket context and for long-term investors, as mostly noise.
The key for the Indian stockmarket is that Modi continues with his plans to cut red tape, root out corruption, upgrade infrastructure, improve the fiscal position (hopefully passing the Goods & Services Tax) so that we finally see a pickup in investment and India is finally able to realise some of its potential. As the first chart below shows there has been no pickup in investment to date in India.
However, we hope the potential for falling interest rates (see second chart below), the final clear-out of bad assets in the public banks and fiscal consolidation will, once the effects of demonetisation have washed through, allow for a pickup in investment and stronger economic growth.
India remains the best domestic story in Asia at the moment – with current reforms and positive demographics in its favour. The base is low in India so the building of roads, provision of mobile telecoms networks, formal banking to the masses, and rooting out of middlemen and corruption can all make a big difference.
The frustration remains that stockmarket valuations are high so that bottom-up we struggle to justify the prices being asked for the better domestic names, although longer term the market continues to look attractive.