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CIO team, 04.02.2018
India’s Finance Minister Arun Jaitley presented the India budget with a focus on improving economic growth, doubling farm income by 2022 and increasing rural and urban infrastructure spend. Education and divestment were seen as key to growth. Some takeaways, from the Budget speech:
Growth: The Indian economy is on course to achieve a GDP growth rate of 8%. The economy has grown at an average of 7.5% since 2014 and is the seventh largest in the world at $2.5 trillion.
Chart: India Growth Trajectory, 8% Looks Possible
Source: India Central Statistical Organization, Bloomberg Mar 2017
Fiscal deficit: The FY2019 budget deficit target is at 3.3%, the FY2018 estimate is for 3.5%. Both are above the government's previous targets.
Chart: Fiscal Deficit (as a % of GDP)
Source: Budget Speech, BE=Budget Estimates; Jan 2018
Infrastructure: Budgetary spend on infrastructure to be INR 5.9 trillion: The government aims to boost the passenger handling capacity by 5 times, targeting 1 billion trips a year to India from the current 124 Indian airports. The Bharatmala project aims to improve road connectivity. There was also a strong focus on Mumbai's suburban rail network, on providing electricity connection to 40 million poor households, and 10 million houses to be built in rural areas
Chart: India FX Reserves at a Record High
Source: Bloomberg, Jan 2018
Rural Economy: Setting up of an Agri-Market Development Fund, 'operation green' to promote farmer produce organisations, agri logistics and processing, “Kisan” credit cards extended to fisheries and livestock. Focus on building infra at agricultural “mandis” and farmer markets. Institutional credit to agriculture to be raised. Grameen Agricultural Market (GRAM) will provide the farmers a direct to buyer sales mechanism.
Taxation: Reforms have helped expand the tax base and tackle bankruptcy. FM Jaitley announced:
Indian domestic fund inflows have grown substantially and compensate for any volatility seen from Foreign Investor Institution inflows.
Chart: Growth in AUMs of Mutual Funds (INR Trillions)
Source: RBI, Sep 2017 (Data for 2017 is provisional)
By international standards, 10 percent capital gains tax is not that prohibitive, there are many countries with very successful capital gains regulations. We expect very little negative impact on the market.
Implications for Equity markets
The Indian Sensex gained 27% in 2017 and is already up 6% in January. Over a 12 month period, energy and financial sectors were the outperformers, while the healthcare and the real estate sectors the laggards.
Whilst valuations are above long term averages, earnings growth estimated at 20% should buoy investor sentiment.
With the rise in allocation to infrastructure steel, cement, agriculture and fertilizer, as well as housing finance companies, mid-level real estate and auto ancillaries look positioned to benefit.
We have previously written on the spending power of India’s burgeoning middle class, the increase of ecommerce, and digitization – all of which will boost productivity and consumption.
Implications for Bond Markets
This is the last full budget during the current term of the existing government. Markets have been pricing in some headwinds particularly on the fiscal front. The government has placed a strong emphasis on public spend. However, the budget is not as populist as was expected.
We maintain our bias towards the domestic and Eurobond issuance. Amongst the sectors, we prefer corporate bonds issued by steel companies, agricultural related entities, infrastructure linked bonds (Airport services, Railways etc) as well as private sector banks.
Chart: Bond Yields Offer Compelling Value When Compared to Their EM Counterparts.
Source: Bloomberg, Jan 2018
The good news for bond investors is the government’s plan to mandate large corporates to place approximately one fourth (1/4) of their own funding needs through the corporate bond market. This in turn should reduce the burden on India’s state owned banks which historically tend to lend for infrastructure projects. This directive should translate to more liquid and efficient pricing on the corporate bond markets and provide a reprieve to some of the banks’ balance sheet ratios.
The recent weakness on the Indian government notes are showing some signs of recovery. On a relative value basis, the benchmark nominal 10-year IGB yields (currently at 7.51%) are well above those of the low- rated Sovereign bonds issued by Indonesia (6.16%), Russia (7.20%), and almost flat to the Mexican bonos (7.57%). From a monetary policy stance, our expectation remains for no policy moves for 2018.
Corporate bonds rated ‘BBB’ or equivalent are investment grade. In India, most regulators only permit bonds with the ‘AA’ rating as eligible for investment. It is now time to move from ‘AA’ to ‘A’ grade ratings.
Wealth Management – CIO Office.
Contact: +971 (0)4 609 3564
Anita Gupta – Head of Equity Strategy
Syed Yahya Sultan – Head of Fixed Income Strategy
Sunny Naqi – Fixed Income Analyst
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