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.
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Risk Warning: All investments involve risk, including possible loss of principal. If applicable, the offering document should be read for further details including the risk factors. Our investment management services relate to a variety of investments, each of which can fluctuate in value. The investment risks vary between different types of instruments. For example, for investments involving exposure to a currency other than that in which the portfolio is denominated, changes in the rate of exchange may cause the value of investments, and consequently the value of the portfolio, to go up or down. In the case of a higher volatility portfolio, the loss on realization or cancellation may be very high (including total loss of investment), as the value of such an investment may fall suddenly and substantially. In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved.
Performance Notes: Past performance is not indicative of future results. There can be no assurance that any investment objective will be met. PineBridge Investments often uses benchmarks for the purpose of comparison of results. Benchmarks are used for illustrative purposes only, and any such references should not be understood to mean there would necessarily be a correlation between investment returns of any investment and any benchmark. Any referenced benchmark does not reflect fees and expenses associated with the active management of an investment. PineBridge Investments may, from time to time, show the efficacy of its strategies or communicate general industry views via modeling. Such methods are intended to show only an expected range of possible investment outcomes, and should not be viewed as a guide to future performance. There is no assurance that any returns can be achieved, that the strategy will be successful or profitable for any investor, or that any industry views will come to pass. Actual investors may experience different results.
Information is unaudited unless otherwise indicated, and any information from third-party sources is believed to be reliable, but PineBridge Investments cannot guarantee its accuracy or completeness.
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Australia: PineBridge Investments LLC is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) in respect of the financial services it provides to wholesale clients, and is not licensed to provide financial services to individual investors or retail clients. Nothing herein constitutes an offer or solicitation to anyone in or outside Australia where such offer or solicitation is not authorised or to whom it is unlawful. This information is not directed to any person to whom its publication or availability is restricted.
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Promoción y oferta de los negocios y servicios de la entidad del mercado de valores del exterior [o financiera, según sea el caso] representada en Colombia.
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Peru: Specifically, the Interests will not be subject to a public offering in Peru. The Interests described herein have not been and will not be approved by or registered with the Peruvian Superintendency of Capital Markets (Superintendencia del Mercado de Valores, or the “SMV”) or the Lima Stock Exchange (Bolsa de Valores de Lima). Accordingly, the Interests may not be offered or sold in Peru except, among others, if such offering is considered a private offer under the securities laws and regulations of Peru. The Interests cannot be offered or sold in Peru or in any other jurisdiction except in compliance with the securities laws thereof. In making an investment decision, institutional investors (as defined by Peruvian law) must rely on their own examination of the terms of the offering of the Interests to determine their ability to invest in the Interests. All content in this document is for information or general use only. The information contained in this document is referential and may not be construed as an offer, invitation or recommendation, nor should be taken as a basis to take (or stop taking) any decision. This document has been prepared on the basis of public information that is subject to change. This information may not be construed as services provided by PineBridge Investments within Peru without having the corresponding banking or similar license according to the applicable regulation.
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Taiwan: PineBridge Investments Management Taiwan Ltd. Is licensed and regulated by Securities and Futures Bureau of Taiwan (SFB). In Taiwan, this material may not be suitable to investors and is not reviewed or endorsed by the SFB.
United Kingdom: This material is issued by PineBridge Investments Europe Limited, licensed and regulated by the Financial Conduct Authority. In the UK this communication is a financial promotion solely intended for professional clients as defined in the FCA Handbook and has been approved by PineBridge Investments Europe Limited. Should you like to request a different classification, please contact your PineBridge representative.
In the UK, this material may also be issued by PineBridge Benson Elliot LLP, registered in England (company number OC317119) with its registered address at 50 Hans Crescent, London, SW1X 0NA. PineBridge Benson Elliot LLP is authorised and regulated by the Financial Conduct Authority.
Uruguay: The sale of the securities qualifies as a private placement pursuant to section 2 of Uruguayan law 18.627. The issuer represents and agrees that it has not offered or sold, and will not offer or sell, any securities to the public in Uruguay, except in circumstances which do not constitute a public offering or distribution under Uruguayan laws and regulations. The securities are not and will not be registered with the Central Bank of Uruguay to be publicly offered in Uruguay. The securities correspond to investment funds that are not investment funds regulated by Uruguayan law 16,774 dated 27 September 1996, as amended.
Last updated 3 June 2021