Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: David Park, co-manager, Carmignac Emerging Discovery Fund.
At long last, the world’s biggest democracy has returned to investors’ radars screens. For the first time in 30 years, India has a new government with a strong mandate for change. Meanwhile, economic growth has bottomed out, which means it should see improvements regardless of government intervention – inflation is falling and the current-account deficit narrowing. Last but not least, India will benefit from low resources prices.
India’s problem in the past has been that the government was unable, and often unwilling, to get things done. Vital reforms were bogged down in legislative wrangling. The new prime minister, Narendra Modi, seems to have broken this logjam. Yes, politics in India is now a one-man show (not always the best thing) and people close to Modi point out he is less of a reformist and more of a good administrator and doer.
Recent government action is largely a continuation of policies started by the previous government, such as attracting much needed foreign investment into the retail industry and liberalising diesel and gas prices. But perceptions count for a lot. And there is a key difference – Modi has a majority in the lower house, which helps him pass tough bills.
The main bill that needs to be passed is the Land Acquisition Act, which is the first step for the government to kick-start India’s investment programme. A lot of Modi’s actions have been behind the scenes, but the market is anxiously awaiting news on these reforms.
Economic factors are better. The current-account deficit is less than 2% of GDP due to improved trade, falling imports and foreign investment. This matters, because it will help the rupee to be more resilient to external shocks. Lower oil and food prices are reducing inflation, now at 5%.
These factors mean India’s central bank will have more flexibility to cut rates in the future. The fiscal deficit should be easier to control too, as the government has made the tough decision to cut fuel subsidies. Tax revenue badly needs to rise, and we still need to see growth pick up. But there is no denying that India’s economic backdrop has got better.
So what should investors look out for? The Land Acquisition Act amendment is key to starting the investment cycle. It won’t be easy – it will be challenged by the opposition. But without it, infrastructure plans, such as dedicated freight corridors, new cities, railways, and new coal mines, will be stalled. Other announcements, such as those on the goods and services tax and foreign investment, are important, but more sentiment-drivers.
We still see value in the Indian market. Bharti Airtel (India: BHRQY) provides exposure to the likely rapid growth of data consumption by India’s mobile-phone owners. Smartphone users account for less than 20% of total mobile subscribers just now, and we believe Bharti will be at the forefront of a data boom in India.
ICICI Bank (NYSE: IBN) is a well-managed private bank in a nation that still has plenty of room for credit and banking usage. Private banks continue to take market share away from government-owned ones and will continue to grow faster than the overall industry.
Finally, United Spirits (India: UNSP) is now owned by Diageo after years of mismanagement. With a 45% market share of the Indian liquor market, and profitability that is around one tenth of Diageo’s on some measures, United Spirits’ potential for improvement is very promising.