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Macro Minutes: India Market Leader or Laggard

In our latest Macro Minutes video, Capital Markets Research Analyst Galen Donaldson covers our top-down views of India.

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Title screen appears "India, Market Leader or Laggard” Underneath the title is the picture of the presenter Galen Donaldson, Fisher Investments Capital Markets Research Analyst on behalf of Fisher Investments and its affiliates. On the bottom right of the screen is a live Galen Donaldson speaking to us from his office.

Galen Donaldson: Hi. My name is Galen Donaldson, and I'm a Capital Markets Research Analyst. Today I'll be covering some of our views on India. We'll talk about India's economy, the impacts from COVID and India's policy response, the influence of politics and reform on Indian equities, and the key investment implications.

On the screen, Galen Donaldson is showing 2 charts under the title "INDIA'S ECONOMIC GROWTH WAS SLOWING BEFORE COVID". The first chart is about India's GDP while the other is about India’s loan Growth.

Galen Donaldson: One of our firm's key forward looking views about the impact of COVID not only for India but globally, is we're likely to see a temporary economic bounce before growth resumes to resembling the pre COVID conditions, and a lot of the economic bounce is likely behind us. When we apply that idea to India, we find the pre COVID growth trend was slowing. GDP growth peaked at 9% in early 2018 and slowed to about 3% prior to COVID. Meanwhile, loan growth peaked at about 15% in late 2018, before slowing to about 6%. One of the reasons loan growths slowed is due to asset quality concerns of banks, which are not helped by policies to help borrowers shrink COVID, such as moratoriums on loan repayments. We don't expect asset quality concerns to pose a systemic risk, particularly for the higher quality banks, but it's a difficult lending environment which likely poses a headwind to strong economic growth ahead, or at least to a growth environment that bucks a trend and is positively differentiated. Versus EM Peers.

On the screen, Galen Donaldson is showing a table titled "INDIA'S DEFICIT HISTORY" about India’s deficit history in response to Covid.

Galen Donaldson: Speaking of India's COVID policy response, like many countries around the globe, India implemented supportive monetary and fiscal policy measures to offset the impact of COVID and support economic growth. Earlier this year, India announced a budget with a significantly higher deficit than expected. Stepping back, another of our key views is stimulus is unlikely to be as stimulative as hoped. Historically, fiscal stimulus programs haven't increased near term growth all that much. And when you look at India's deficit history, India tends to do better on a relative basis versus EM when it's shrinking its deficit. When India expands its deficit, the performance history is mixed. India tends to underperform EM on average, with a slightly better than coin flip frequency of outperformance. This phenomenon is likely explained by India's dual deficit, which makes the country more vulnerable to external shocks. So, investors prefer when India is improving its fiscal position and tend to be more nervous when it trends the other direction. There are a couple of offsetting factors. First, like many EM countries, India has directionally improved its position over the last five to ten years. And second, one small positive to emerge from COVID was an improved current account that was mostly from falling imports and temporary.

On the screen, Galen Donaldson is showing a chart/timeline titled "LOW POTENTIAL FOR REFORM DRIVEN OPTIMISM" explaining the low potential for reform driven optimism. And recent actions against foreign firms.

Galen Donaldson: One driver that can lead to Indian outperformance is reform. India has a history of periods of reform optimism that can last for several years. For example, the election of Modi to his first term in 2014 had honeymoon effect for Indian equity markets and India outperformed for about three years before Modi. There had been hopes of reforms for some time, but previous Prime Minister Singh had been in office for nearly a decade, with little done under Modi optimism built for reforms such as a nationwide goods and services tax and implementation of bankruptcy Code, which led to a multiyear period of outperformance. The honeymoon effect is followed by a period where reforms are often watered down and clawed back during implementation, which tends to be much harder. And that's an environment where India didn't do as well. We're monitoring the globe for countries where we see the potential for a sustained period of reform, optimism to build, and for India, the likelihood of another honeymoon phase building today is low. They tend to happen around elections, which is when political capital is at its highest. Recent reform announcements have been modest in nature, or even modest clawback. Some modest reforms include lowering the corporate tax, labour reform, reducing government supervision, and in banking, we've seen some discussion of privatization and selling stakes in a couple of state-run banks. Modest clawback includes India's approach to foreign direct investment. As an example, in 2015, India did a big liberalization of foreign direct investment regulations, which continued to build through mid 2016. Since then, the trend has mostly been reversing, and India has increasingly taken action against firms from the US. And China. This includes ecommerce legislation in 2018 on US. Investments in ecommerce, increased foreign direct investment restrictions on China, and banning many mobile apps from China, and banning new card issuance in the payment space.

On the screen, Galen Donaldson is showing 2 charts under the title "INDIA TENDS TO HAVE A VALUE AND DEFENSIVE TILT". The first chart is of India’s relative returns and EM style, and the other chart is value and defensive tilt.

Galen Donaldson: Turning to investment implications, India tends to have a value and defensive tilt, due to the types of companies found in its index. In relative exposure terms versus EM, India has more financials, energy, and materials, which tend to be more value oriented, and more consumer staples, utilities and healthcare, which tends to be defensive and explains India's value and defensive tilt over time. India's relationships with these style factors aren't quite as strong as some places like Brazil's with value, and there are periods with deviations. For example, in the middle to back half of2020, India traded like tech, when every country with a lot of technology acted like growth. India has a large tech sector just under 18% in absolute weight terms. Now, keep in mind, India's tech and tech like sector skews towards relatively slower growing It services. India doesn't have as much of the higher growth Internet and ecommerce and tech firms found elsewhere in Asia. And since the November 2020 vaccine efficacy announcement, India has acted like value, which we expect to continue, given our outlook for a late cycle bull market led by growth. This supports an underweight positioning. However, India is the fourth largest weight in EM, at just under 11%. So we want to have some exposure to the country, consistent with our outlook for high quality growth categories like technology to lead. We have the bulk of our exposure in It services, where demand largely comes from the developed world, and we also own a small amount of high-quality banking exposure as a value hedge and to give us some exposure to India's domestic economic growth.

On the screen, a white background appears with black written text that read as “thank you for watching! If you would like to learn more about our view, please reach out to your relationship manager or email

A series of disclosures appears on the screen.

Galen Donaldson: Thank you for watching. If you'd like to learn more about our views, please reach out to your relationship manager.


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