Public spending, tax reform and interest rate cuts are likely to drive Indian equities higher, sustaining their strong performance since March.
“Measures to kick-start infrastructure spending are a key focus for the government which could benefit industrial companies,” said Vikas Shah, portfolio manager and Indian equities specialist at Emerise, part of Natixis Asset Management.
“The growth in India right now is largely dependent on the consumption side and less on investments. So we need a more balanced growth moving forward,” he told Fund Selector Asia.
The benchmark Nifty 50 index is trading at a price-earnings ratio of 19 times, based on the earnings to March 2017, and above the long-term average. Shah estimated earnings growth to hit 15% in the fiscal year 2017 and 20% a year later.
Shah is also confident that the good and services tax (GST) that will be introduced in the first quarter of next year will have a positive impact.
The new simplified tax structure should reduce retail prices and boost household consumption. It will also improve the ease of doing business in general, he said.
“One sector to clearly benefit is automobiles, which are taxed at 24% on average,” he added.
A likely new 18% tax rate will encourage consumer demand, and higher sales volumes should improve auto-manufacturers’ margins.
Sanjiv Duggal, HSBC Asset Management’s head of Asian and Indian equities agrees that the “goods & services tax [reform] is expected to support fiscal stability, bring down the cost of doing business, help companies deliver better margins and also pass some of the gains to consumers.”
Meanwhile, lower inflation figures should allow the Reserve Bank of India to reduce interest rates further.
Shah believes that these trends should alleviate pressure on India’s financial sector too, “as the bad loan cycle smoothens going forward and demand for credit increases on the back of higher spending.”
Wider investor concerns about emerging markets should only have a temporary effect.
“A [reduction] in global liquidity, whether due to a strengthening of the US dollar, a Fed rate hike, or a decision by the European Central Bank to stop printing more money, will create market volatility. But that usually affects [emerging] markets for two-to-four quarters. As they settle in, one can start to look for long-term growth drivers,” said Shah.