Emerging market equities are Candriam’s strongest regional overweight conviction, ….
… as (a) they have the highest re-rating potential (with a still-attractive relative valuation), (b) economic growth is stabilising and (c) the scope of USD appreciation is limited. However, central bank uncertainties and a less supportive commodity environment than at the start of the year has led us to focus on one of our preferred emerging market countries: India.
Economic fundamentals are improving, both structurally and cyclically. For the first time in more than a decade, the current account balance is on the verge of turning into a surplus while consumer price inflation is under control (5.1% in August). At 7.8%, India continues to enjoy the highest GDP growth expectations among BRIC countries for both this year and the next. Currently, the economic cycle is gaining momentum, as witnessed by the most recent composite PMI index (54.6).
The resilience of the Indian economy is supported by a domestic reform agenda, which makes India less vulnerable to external influences. Unlike previous stress situations in recent history (e.g., the taper tantrum in Q2 2013), the Indian economy is benefiting from the Bank of India’s NPL reform targets, which aim to repair the monetary policy transmission mechanism, and is expected to leverage on the implementation of the Goods and Services Tax bill, targeting a common Indian market.
In the current context of consolidating commodity prices, we expect commodity importers such as India to catch up vs. exporters. Clearly, Indian equities have outperformed the overall emerging markets in the second part of this year, as external drivers (read: USD dollar weakness and commodity consolidation) have become less important performance drivers. We expect this momentum to continue.
Nadège Dufossé – Head of Asset Allocation – Candriam Investors Group