India was previously plagued by a high fiscal deficit, bad policy choices, high commodity prices, an extended credit cycle, high inflation and a weak currency. Now it has a credible and strong-willed central bank, a reform-minded government, and commodity price falls which are very beneficial to its terms of trade. We are increasingly confident that some of the major blockages for reform are in the process of being dismantled, and the government has already taken some bold steps, such as removing fuel subsidies.
In a market context, India has moved from one of the ‘fragile five’ to being highly favoured among emerging market investors, and near-term valuation multiples have moved to reflect investor optimism. We anticipate that some investor fatigue will be felt; however, over the longer term, India still looks very attractive, and is in the early stages of recovery from a cyclical downturn. Hence, current valuations are likely to be underestimating the profit upcycle for years to come and we think India will be one of the strongest equity markets in the world over the next five years.
Rob Marshall-Lee – Newton, a BNY Mellon company