The impact of inflation and monetary tightening in the first quarter of 2011 restricted Indian equity performance but the country’s structural growth drivers remain intact and this bodes well for equities in the medium to long term.
Concerns about the impact of inflation and monetary tightening on growth have restricted Indian equity returns so far this year.
Foreign investors redeemed funds from many emerging markets, including India, to invest in the developed world where economic growth was showing signs of a recovery.
However, this trend has reversed since early March, given the stronger growth and economic fundamentals in emerging markets, and this dynamic has helped Indian equities make a strong recovery.
India is the only big global economy besides China expected to continue growing at a high single-digit rate this year.
I believe this superior growth rate will continue to attract investors, given relatively lower growth expectations across many markets.
Inflation is a concern in the near term but its impact on economic growth is likely to be limited. Despite high inflation and continued tightening measures, consensus expectations are that GDP growth in 2011 will be about 7-8 per cent, which is very attractive in the current global context.
The Reserve Bank of India is expected to keep raising policy rates to contain inflation and support long-term sustainable growth.
The current policy rate is turning restrictive but is nowhere near the peak of 9 per cent in October 2008. Thus, the central bank has enough ammunition to deal with inflation.
Although the price of oil can have a material impact on the Indian economy, India’s dependence is relatively low compared with most bigger economies.
Coal is the predominant source of energy in India, accounting for 52.4 per cent, due to its abundant avail-ability. New oil and gas discoveries in recent years have ensured dependence on imports does not rise with growing oil demand. The situation should improve as production in new oil blocks increases in coming years.
Short-term concerns may continue to dampen investor sentiment but investors have reason to be positive. The economy is demand driven, steps are being made towards better governance and there has been an improvement in foreign direct investment.
The fund is positioned to benefit from structural growth in India and is overweight the consumer discretionary sector, particularly through select fast-growing automobile and ancillary stocks and branded retailers.
It also has a large exposure to certain banks with low-cost funds as well as niche financiers that benefit from capital expenditure cycle and infrastructure development.
The fund also has overweight positions in software services companies with strong market positions.
These big firms are well diversified across product categories and well positioned to leverage their large customer base when there is an increase in technology spending in Western markets.
Teera Chanpongsang is portfolio manager of the Fidelity India focus fund