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India's Transformation Attractive Yet Strong US Dollar Signals Wait
08/09/2018 4:58 pm EST
Indian economic transformation and growth remain a durable theme to which U.S. investors should be attentive. However, the strong U.S. dollar alone makes Indian stocks currently unattractive to U.S. investors, writes Monty Guild Thursday.
The Indian growth story is still strong. Indian corporate earnings growth is strong as well, boosted by the arduous reform work undertaken by Prime Minister Narendra Modi since his party’s 2014 victory.
We knew it would be a long haul, but the benefits are materializing and Indian economic fundamentals are strong. For U.S. investors, though, U.S. dollar (USD) strength remains the problem; as long as the U.S. dollar remains strong, it challenges the returns that U.S. investors will make on Indian stocks.
When that trend shifts, we will reassess our view of the attractiveness of India and several other Asian emerging markets.
India economics: steaming ahead
The Indian stock market has seen a strong year, continuing the rise from the bottom at the end of 2016.
Source: Bloomberg Finance LLP
When expressed in U.S. dollars, however, the chart takes on a different hue.
U.S. dollar strength has meant that in U.S. dollar terms, the Indian market has still not returned to its January highs.
Source: Bloomberg Finance LLP
In short, the domestic Indian economic recovery and transformation remains a durable theme. This is a theme we have noted since Narendra Modi became Prime Minister in 2014.
We believed then as we believe now that Modi could be a transformative leader for India, and could help lead the country into a position as a strong global manufacturing power. We also believed, both then and now, that India’s transformation, if it were successful, would be prolonged and arduous, due to a long tradition of corruption and inefficient state economic dominance.
Modi is doing yeoman’s work, but it’s a slow process.
Economic growth remains strong, and rough proxies -- such as private credit growth and auto sales, as tracked and reported by excellent emerging-markets analyst Jonathan Anderson -- confirm the official figures. Indian corporate earnings are also strong.
Source: Emerging Advisors Group
Inflation and the trade balance remain under control, with oil prices being the potential fly in the ointment for the country’s external trade deficit. But for U.S. investors, the key remains the dollar. India is a good story -- long-term, probably a great story.
In the near-term, though, as we have said regarding many strong emerging-market economies, U.S.-dollar based investors should hold off until more favorable currency trends emerge.
Investment implications: Indian economic transformation and growth remain a durable theme to which U.S. investors should be attentive. However, the strong U.S. dollar alone makes Indian stocks currently unattractive to U.S. investors.
When U.S. dollar strength moderates, we will update investors on which emerging-market economies we view favorably.
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