The Indian economy is healing rapidly from the Covid-19 crisis. The contraction slowed to 7% in the quarter ended September 2020 from a 23% rate in June, with the manufacturing, utilities, and agriculture sectors showing positive growth. The year ended with the highest monthly and quarterly tax collections for 2020. Auto sales rose more than expected, while bank balance sheets were on better footing than in 2019, with no signs of deterioration. Manufacturers of consumer durables have reported higher orders, technology companies are seeing good growth as digitization efforts of global corporate clients accelerate, and chemical companies are gearing up for capacity expansion as global demand rapidly builds.
Source: Press Information Bureau, Ministry of Finance, Government of India, January 2021. The chart indicates monthly percentage change in GST collections on YoY basis. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
Another major tailwind for companies is access to cheap capital, with real interest rates coming down and mortgage borrowing rates now lower than the savings rate on long-term provident fund deposits. These trends augur well for an acceleration of domestic investment activity. By keeping rates low, the central bank is hoping to accelerate investments and boost supply to match rising demand, eventually taming inflation. As demand rises in the economy, we don’t expect funding for capex to face hurdles.
Note: Real Interest Rate is the difference between Bank Weighted Average Lending Rate (WALR) and Consumer Price Index (CPI). Source: Reserve Bank of India, PineBridge Investments as of 24 December 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
In addition, the increase in the weighting of Indian equities in global equity indices along with the better-than-expected economic recovery have resulted in the largest foreign portfolio inflows in recent years, with India among the leaders in emerging market inflows for 2020.1 Equity capital-raising by Indian firms in the primary market continued, allowing them to deleverage and ramp up resources to invest and grow. The breadth of the market improved, and many stocks that were underperforming earlier went up on the back of sustained foreign inflows. In our view, the market is playing to stock pickers’ strength as many investment opportunities come to the fore due to the changing dynamics of commerce.
Source: Bloomberg, PineBridge Investments as of 31 December 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
While the pandemic still isn’t fully out and vaccine still isn’t fully in, the vectors that had started to benefit Indian companies and their earnings before the pandemic have now become even more powerful. These include digitization, direct-to-consumer sales, climate change-mitigating efforts, geopolitical rewiring of supply chains, and greater attention to social concerns, among others. Added to this list in 2020 was demand related to health and housing.
The pandemic has changed peoples’ habits and thereby the nature of demand. While surely some sectors are facing less of it, others are having a hard time meeting seemingly insatiable demand. Therefore, to determine future winners, investors should revisit assumptions about companies and their dominance before the pandemic. The opportunities arising from this wide-ranging disruption are rare and play to the strengths of active investors.
We believe valuation parameters based on recent earnings of most companies are not representative of future returns because earnings haven’t stabilized yet. While the markets have recovered and price-earnings multiples have risen, we believe great investing opportunities still abound. In our valuation analysis, we found that for MSCI India Index constituents, the average earnings estimates for the 12 months ending March 2022 have fallen 14% since the beginning of 2020. However, average stock prices have increased 21% in 2020. Time-adjusted price-earnings multiples have also gone up over the same period, and they contribute nearly 90% of the index weight.2 This suggests that investors are disregarding near-term earnings and are now more optimistic about the medium- to longer-term earnings.
We maintain our long-held belief that financially strong companies run by able management teams can adapt to change and produce satisfactory results for their owners. Our strategy remains the same: to identify such names and invest in them.
Our positioning in Indian equities is to invest in well-managed companies that can efficiently deploy large sums of capital. These would include well-run financial, materials, pharmaceutical, health care, information technology, and housing-related companies. Given the lower cost of capital, such companies should be able to grow at the expense of their peers. We have invested in companies that are taking advantage of various technological disruptions in their industries, and we believe they will grow at disproportionately higher rates than those that are sticking to the conventional ways of doing business.
1 Source: Bloomberg, PineBridge Investments, 31 Dec 2020. Data considered for markets where the complete year's data is available on Bloomberg.
2 Since we measured price-earnings multiples at the beginning of 2020 and at the end of the year, we adjusted them using time value of money of 10%. Therefore, a multiple of 20 at the beginning of the year would be equivalent to 22 at the end of the year.
Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.