It's been a very tough time to be long Asian equities. Among Asia's major markets, only two show positive performance over both the short-term and the long-term: India, and Indonesia.
India has taken over the mantle of Asia's fastest-growing economy, with Indian GDP forecast by the IMF to grow 6.8% this year. It's also the fastest-growing nation in the G20 grouping of the world's largest economies. So there's good reason Indian equities have stood up well.
The benchmark Sensex is up 4.9% in the last month. It is even in the green when you look a year back, with a narrow 1.0% advance. So far this year, Indian stocks suffered through sharp drops in March and June but have rallied each time, with the Sensex notching an 18.9% advance since mid-June.
Can India sustain that pace? Will Indian equities continue to provide a strong defense, and even some offensive, as global stock markets march inexorably along their procession south?
Inflation is certainly a major concern for Indian policymakers, just as it is in the United States. Retail inflation in India is running at 7.4% as of September, having hit a five-month high on the back of elevated food and fuel costs.
That in turn is driving the central Reserve Bank of India to raise rates. The benchmark interest rate is now at 5.9%, after four straight increases, although the RBI opted to leave rates unchanged when it held a surprise meeting last week. While the monetary-policy committee did convene last Thursday, it instead discussed how to word the RBI's report to government since the committee has missed its inflation target for three straight quarters.
The RBI committee is mandated to keep inflation within 2 percentage points of its 4% target. To fail to keep inflation below 6% for three quarters in a row -- it has been above that level since January -- necessitates that the central bank explain itself to the government, and outline what response it plans to adopt.
Markets were spooked when the surprise meeting was first announced. But there was no rate change, with RBI Governor Shaktikanta Das citing the Russian war in Ukraine as a primary cause of the inflation overshoot. Controversially, India has been a major buyer of Russian oil, to lower fuel costs.
The RBI will surely raise rates again in December, and the question is by how much. Rate watchers expect an increase of 35 to 50 basis points. We should soon have inflation figures for October, which will help shape the level of the rate increase.
But India may be nearing the end of its rate-rising cycle first among major nations. Société Générale's Indian economics team anticipates a "terminal rate" of 6.5%, which it has nudged up a quarter point, but is not far off the current 5.9%.
"While this seems to be a modest increase in the context of a rather hawkish Fed, we believe that the RBI will not have much appetite for a steeper rate hike," SocGen India economist Kunal Kundu and emerging-markets strategist Vijay Kannan explain.
I had a back-and-forth with Kundu as to whether India will emerge first from the rate-rising cycle. He agrees it may well be, with a pivot not far off. "The dovish pivot will be necessitated mainly because the economy needs to be supported as employment remains a major concern," he says. "Despite the lower growth though, India would still be the fastest growing G20 economy."
Kundu expects inflation to drop back below 6% by Q2 next year. Meanwhile, the IMF anticipates that GDP growth will slow to 6.1%, but still a rate that would be the envy of many nations.
Earnings growth is strong among Indian companies. More than half of the companies that have reported earnings this quarter notched a positive surprise. That performance is what inspires SocGen to make India its core emerging-markets holding.
Another positive: the direction of the Indian economy is domestically driven. Any slowdown or prior disappointing growth figures in India have been dictated by local conditions, including policy choices, rather than any lackluster global demand or slowdown in exports. India is standing on its own two feet, economically.
That's not to say life is rosy for rank-and-file Indians. The price of cereals and vegetables in particular has skyrocketed, partly because India experienced unseasonably heavy rains. The pandemic precipitated a jobless problem that is continuing even as Covid eases for structural reasons.
Agricultural work, the top job sector, peaked in India in 2006, Kundu notes. The construction sector, which accounts for the second-largest chunk of Indian jobs, had been absorbing unskilled or lower-skilled workers moving out of the farm sector. But it has struggled for a decade after a property bubble burst, and with new rules in effect to curb the real-estate sector's previously cowboy nature.
The polite word for what's been going on in India is "economic formalization," a process all developing nations experience as they mature. But it is particularly painful in India, which has a higher share of its work force in "informal" jobs than any other comparable country. After the pandemic, only 42% of its work force has a job, indicating that many informal workers have been discouraged from looking for work, and dropped out of the work force.
These are not easy issues to solve. In the long run, Kundu notes, the government should invest more in education and healthcare, and less in populist policies. But that's a very long-term fix indeed. Infrastructure spending can ease some of the immediate pressure on jobs by offering some of those despondent, low-skilled jobseekers a steady paycheck.
The central bank and the government do not want to make matters worse. The RBI cycle will likely peak in Q1 2023, and with growth broadening and strong in cities, it looks like investment-led sectors of the Indian economy stand to gain.
The Indian currency has suffered as the U.S. dollar rose. The Indian rupee in July broke above 80 to the U.S. dollar for the first time ever, and currently still stands above that level, with US$1 worth 81.40 rupees. Since mid-January, it is down 10.3%.
Central-bank chief Das says the main cause of the currency's decline has been U.S.-dollar strength -- and it's true that the magnitude of the rupee's drop has not been unusual by Asian standards. He has indicated that he does not plan to use interest rates to defend the rupee.
The currency has in fact strengthened sharply this month, from almost 83 to the U.S. dollar to its current level. Markets are also anticipating the "terminal rate" for the U.S. Federal Reserve, and FX traders anticipate that beaten-down Asian currencies could rally as markets feel confident the rate is set.
It's been wise to hedge equity investments against rupee weakness. But if the situation does reverse, unhedged Indian investments may start to reward U.S. holders.
Jefferies notes that Indian equities have shown "remarkable resilience" in the face of higher interest rates, and selling by overseas investors in the first half of the year. International buyers returned to buying in Q3. Jefferies has 40% of its Asia ex-Japan portfolio allocated to India, with only 27% devoted to China. Another 11% goes to Taiwan and Korean tech.
While calendar 2022 has mainly been a year of consolidation after a strong 2021, it looks like Indian equities will retain their place as a solid way to offset declines in other global markets this year and into next.