With Indian equities again being the star performer year to date, do you see a danger for India becoming over-valued? Could there be too much hype priced in to Modi’s policies?
India has performed very well since the start of 2017. Investors have appreciated that the economy was not impacted by November’s ‘de-monetisation’ initiative as much as some commentators feared. It has since been realised that the ruling Bharatiya Janata Party’s (BJP) success in elections held recently in large states, such as Uttar Pradesh, has given the reformist Prime Minister, Narendra Modi, a further mandate for change. There may be some short-term retracement in the Sensex Index, but as the combined capitalisation of all listed Indian companies is still only, for example, a third of the French market capitalisation, we are firmly of the view that the patient holder will enjoy material longer-term upside.
Some of our belief in the future hinges around the absolute size of the Indian population (roughly 1.1 billion and equivalent to 17% or so of the global population), and a belief that rising per capita incomes will translate into robust earnings growth for companies geared into the domestic economy. However, most of our enthusiasm revolves around the raft of reforms that Modi has ushered in: red tape has been cut; the tax code has simplified; and inefficiencies in the banking sector are being addressed. In addition, rules over foreign investment have been eased, infrastructure spending has been pushed to record levels, and the basic framework needed to support a new digital economy has also been installed. All of this is designed to foster competition and innovation whilst driving high rates of growth in the economy. We believe that the full benefit of the reforms has yet to be seen and, in our view, there is plenty of scope for the market to head higher over time.
With the dollar rally subsiding where do you see sterling moving from here?
We can break this question into three parts: what is moving the dollar, what is moving the pound and what is happening in the rest of the world?
Firstly, the dollar has rallied as interest rate expectations have risen and on expectations that President Trump’s tax and spending policies will boost the US economy. Doubts have crept in as to how much he will be able to do, particularly following the failure to pass his proposal for replacing Obamacare, and as a result the dollar rally in trade weighted terms appears to have petered out. Predicting what Trump wants to do against what he is able to do is a difficult game to play. A Republican Congress should give him an easier ride but, as we have seen with healthcare, it cannot be taken for granted.
Secondly, the pound appears to be all about Brexit. If the UK gets get a good trade deal and the negotiations go well then we may expect much of the falls of last year to be reversed. If we have a hard Brexit then the currency may decline further. Since the referendum vote the UK economy appears to be holding up well but inflation is moving up in the short term. If prices rise faster than wages, as seems likely, then this may constrain UK economic growth. The UK and EU have yet to get into serious negotiations and do not agree on the agenda yet. For now it looks as if the pound will trade around current levels until we get more clarity on the negotiations.
Finally, economic statistics elsewhere are picking up even in Europe. Forecasting currencies is never easy and has also been a case of looking for the least unattractive option. Which, in recent times, has often been the dollar where the economy recovered from the financial crisis and interest rates looked as if they would rise sooner than in other parts of the world. This has now been largely priced into markets and at our latest Investment Committee we moved from positive on the US dollar to neutral.
If we are purely looking at the dollar sterling exchange rate we expect it to continue in the range of 1.20 to 1.26 for the time being, but beware of political developments.
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