India September 2018
Growth is even stronger than expected.
The Indian central bank raises the repo rate by 25 basis points to 6.5% at the beginning of August. This is the second increase in the last three months. A bank employee in New Delhi shows an Indian 2000 rupee note. ZHANG NAIJIE KEYSTONE/XINHUA
India stands out from other emerging markets with impressive fundamentals. Nevertheless, small and mid-caps remain under pressure. Combined with the weaker rupee, this makes the timing for an entry ideal at the moment, says Chrys Kamber, Head of Indian Investments, in her Insights.
The deterioration of the Turkish economy triggered a risk aversion in global emerging markets. Their currencies came under pressure following the meltdown in Turkish Lira. The Indian rupee hit a record low of 70.9 against the US dollar at the end of August, over concerns that the financial difficulties faced by Turkey would spread to other emerging markets. The recent fall in rupee has given a boost to exports, but the rupee depreciation will nonetheless have an impact on inflation and the current account deficit, as India is a net importer of crude oil. The bright side is that foreign investors are back in the market since July after a continuous sell-off from the beginning of this year.
Robust growth, rising interest rates
India stands out from other emerging markets, due to its impressive fundamentals. The first quarter GDP for fiscal year 2018 grew at 8.2% year-on-year due to higher growth in the financial and real estate sector, supporting the fact that the Indian economy is in its recovery phase. The Reserve Bank of India (RBI) increased the repo rate by 25 bps to 6.5%, the second hike within the last three months. Jump in input prices, hike in the minimum selling price and inflationary pressures were the main reasons behind this move. Meanwhile, the RBI maintained its growth forecast for FY19 at 7.4% and retained a neutral stance, where further policy decisions will depend on global conditions.
Ideal time for investments in small and mid-caps
Despite stellar first quarter earnings, small and mid-caps remain under pressure. After a secular three-year outperformance, these companies are going through a healthy correction. The reclassification of the domestic mutual funds, the re-imposition of the long-term capital gain tax and the high valuation premiums incited the consolidation while the large cap index, Nifty is hitting all-time highs in INR terms. A breakdown of the Nifty’s holdings reveals that a significant part of this return has been driven by only a handful of stocks with higher weightage while the rest of the large cap companies are still struggling. The negative global sentiment and the uncertainties around the next general elections are driving market participants to stick to the selected large cap names, hence domestic flows are diverted to large cap strategies. The correction in the small and mid-caps has brought down their valuation premium and with the rupee at all-time low, it is a perfect constellation in buying opportunity for foreign investors.
Padma India Fund slightly behind benchmarks
In August, Padma India Fund posted a loss of -1.7%, underperforming the Nifty Smallcap 100 Index (USD) which lost -0.8%. The large cap index, NSE Nifty 50 turned negative in USD terms with a loss of -0.5%. The industrial and consumer discretionary sectors contributed a negative performance while financials and materials sectors supported the portfolio with positive returns. Vinati Organics Ltd. was the major outperformer while KEI Industries Ltd. was the major laggard. Due to the stellar 1QFY19 earnings and the positive outlook for FY20, Vinati Organics Ltd. stock price appreciated significantly this month. KEI Industries is one of the leading wire and cable manufacturers in India. Government initiatives in the infrastructure and power sectors combined with capacity addition, large dealer network and a strong brand augur well for the company to capitalize the domestic opportunity.