By Edward Bland
Despite the failure of GDP to meet the beginning of year forecasts of 7.5% per annum growth, India’s main index, the BSE Sensex 30, ranked as the clear winner in market performance terms in 2012 when compared with other BRICs.
Favoured by Duncan Lawrie Private Bank at the start of the year, India knocked the other BRIC countries into a cocked hat, appreciating in monetary terms by over 15%.
The question at the start of 2013 is who to watch this year? In India, investors were given a roller coaster ride, with a depreciating currency thrown in for good measure, and it was only after the middle of the year that the BSE Sensex 30 index established a firm upwards trend.
The catalyst for this firmer course was the government’s third quarter announcement of reform initiatives, including the resurrection of foreign direct investment (FDI) in multi-brand retail.
The Indian government, at long last, appears to be taking steps to cut some of the red tape and investors can take heart that further long pending reforms to stimulate the economy now stand a better chance of being implemented. This year there was a surge in manufacturing and a boost to industrial output, the latter coming from a revival in infrastructure investment.
The question on India is, however, whether it will continue to be the prime performing emerging market. In 2014, India faces a General Election and electioneering may incentivise infighting and stall developments. The likelihood of consistent delivery of long-awaited reform bills is also fairly low.
While not losing faith in India’s enormous growth and long-term potential, we believe valuations in China have reached historically low levels and do not properly discount the pick-up in GDP growth rate and corporate earnings expectations. The transition to new leadership has gone smoothly, providing more certainty and promises more impetus to measures to support domestic consumption such as basic health care, and the acceleration of urban and infrastructure investment.
In summary, in the short term the market may once again be disappointed by the lack of progress in India, in contrast to China which is much better placed to implement large scale reforms, such as the Special Economic Zones from the East Coast to the West, which will increase urbanisation, improve per capital income and drive consumer spending higher. China is certainly set to be the top dog in 2013 but India’s long-term potential mustn’t be discounted – it remains to be a compelling longer-term investment proposition.
Edward Bland is director and head of research, Duncan Lawrie Private Bank
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