India: In a Protracted Slowdown
The Indian stock market is going from strength to strength. The BSE Sensex index is up 28% current year to date. Premised on a second half recovery, consensus is forecasting that the Indian economy will expand by 7.2% in the current fiscal year and by 7.5% in the next.We are of a different view. We believe that the Indian economy is in the midst of a protracted slowdown and that stock market valuations are stretched given the earnings outlook over the next 1-2 years.
India has reached a tipping point. We expect GDP growth to be range bounded between 5% and 6% for the next 24 months as India’s corporate and banking sectors, under the watchful eye of the newly empowered RBI, are forced to work through the excesses of the last investment super cycle. Combined with high real lending rates, falling capacity utilisation rates and softening demand, the implication is that corporate India is headed for another round of deleveraging and the capex and credit cycles another leg down.
This is necessary if the corporate profit cycle is to turn, and India is to get to the next investment led business cycle upturn. Overcoming these cyclical challenges will put the next upcycle on a strong footing. However, to secure long-term gains the short-term economic costs will have to be borne and are unavoidable. The stock market is yet to realise this.
We remain long-term India bulls and believe the country’s future is bright, but right now it’s crunch time. Consequently in our December year-end strategy report we will be downgrading India in our regional equity strategy from Overweight to Underweight.
In the attached Asianomics Country Report No.11/2017, India: In a protracted slowdown, 18 October, we discuss in detail our change in view, ahead of the impending downgrade.
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Asianomics, founded by Dr Jim Walker in 2007 and based in Hong Kong, specialises in economic analysis research, cross-referencing their work with credit cycles, profit cycles and cash flows. Asianomics focus is on developments in the Asia-Pacific region, and they also cover developed markets like the US and Europe.
The Austrian Economics model provides a framework for the economic research. The basis of the School of Austrian Economics is that economies work more efficiently and effectively when companies and individuals are free from excessive interference by government and special interest groups. The Asianomics economic research team includes Deputy Chief Economist Sharmila Whelan who is recognised for non-consensus thinking and her depth and quality of primary research, and Chief Economist Dr. Jim Walker.
Asianomics’ subscribers have access to regular economic commentary, stand-alone Country Reports, Special Reports and Investment Strategy Reports. Dr. Jim Walker also provides weekly webcasts.
Dr. Jim Walker is regarded as one of Asia’s leading economists. Prior to setting up Asianomics, he was the Chief Economist at CLSA Asia-Pacific Markets, where he worked for more than 16 years. He has achieved numerous ‘Best Economist’ rankings in the Asiamoney, Institutional Investor and Greenwich surveys of fund managers.
Previous successful calls include:
- In 1995 Dr. Jim Walker wrote about the prospect of Asia being forced off its de facto dollar peg “within the next two-three years”. The Asian Crisis, precipitated by the Thai baht devaluation, began in July 1997.
- Forecasted the US 2007 downturn and financial sector meltdown in series of ‘Apocalypse’ reports.
- Called early the upswing in the Indian stock market in the final quarter of 2013.
Recent Recommendations:
- Overweight China - We are overweight Chinese equities with momentum improvement in the economy.
- Short Sterling, Long Renminbi - China’s currency offers good upside with a positive carry.
- Short European Financials, Long Indian Financials - This is the simplest pair trade to play superior demographics and growth in Asia relative to the region with the biggest problems.
- Long EM Asia, Short Developed countries - South and SE Asia, and direct investors from North Asia, are ‘buy and hold’ investment bets.
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