As sell-off looms in US, India stocks set to gain History points to a rally once rate cycle bottoms out
espite scaling new peaks, Indian stock markets remain one of the favourites for money managers amid growing expectations of a sell-off in US markets and as analysts call of a bottoming out of rate cycle in Asia’s third largest economy.
The fundamentals of Indian markets are strong. The country has been witnessing the fastest growth, and the upcoming implementation of the unified tax regime in India is expected to boost sentiment.
“We like India because of structural reforms, the falling cost of money and the quality of companies,” Irene Goh, head of multi-asset solutions for Asia Pacific at Aberdeen Asset Management told Gulf News.
The most-watched Bombay Stock Exchange index has been on a record breaking spree, posting more than 20 per cent gains over the past year. This means outperformance compared to 18 per cent gains on MSCI emerging market index during the same time period.
National Bank of Abu Dhabi is also overweight on Indian equities. “Indian equities appear to be in a new medium-term uptrend, with little overhead resistance,” said Claude-Henri Chavanon, managing director, head of Global Asset Management, National Bank of Abu Dhabi.
And due to this, foreign investors have been pouring money into the country, expecting higher returns.
In the quarter to March, buying from overseas investors was robust. Foreign investors bought $6.7 billion (Dh24.6 billion) of Indian stocks, the highest among major Asian markets following an outflow in the last quarter of 2016.
Fund managers call India a defensive play as global headwinds looms.
Analysts expect interest rates in the US may rise faster than anticipated, but in India, signals are that interest rates may soon be bottoming out, which might benefit Indian stocks.
Historical evidence suggests that in the previous three cycles, the equity rally started after interest rates bottomed out. The BSE index more than tripled between April 2003 and 2008 after rates followed a falling trajectory. Again, since 2008 the stock market has gained more than 300 per cent till date.
“A fixed income rally is normally followed by an equity rally. History suggests that an equity rally starts after interest rate cycle bottoms out,” said ICICI Prudential Asset Management in its yearly outlook.
Defensive play
Even in case of many headwinds globally, right from interest rates cycle in the US, or the elections in France and other geopolitical factors, fund managers call Indian stocks a defensive play.
“The global macro risk is a global macro risk. It would impact every single asset class across the globe. We are a footnote in that story. India is actually a defensive play in that. Our relative ability to withstand a global storm is acknowledged quite well. We are in that sense a very defensive bet in a global macro shock scenario of reversal of an easy money policy. and further tightening by the US Federal Reserve. India would actually outperform in that scenario,” Leo Puri, managing director at UTI Mutual Fund said.
Even Soledad Lopez, emerging market equity strategist at UBS Wealth Management agreed to Puri’s point of view.
“India is more defensive than the average emerging market, with higher exposure to health care and consumption. Its current account is also in a better position than it was three years ago, and it has the highest expected earnings growth in emerging markets,” Lopez said.
In all, India is one good story available for investors.
“There are few countries in the global investment universe that offer the strong underling demographics that India has in place alongside the political leadership energising a reform programme on the scale that India appears to be delivering,” said Gary Dugan, chief investment officer at Emirates NBD.