India is a ubiquitous study in contrasts and contradictions, and it is equally true for investors. One side of its ledger can make even the most optimistic investor cautious — corruption and graft are rampant, and tax policies often badly conceived. The caste system still prevails, while sanitation almost does not exist. And the rupee’s recent performance has been nothing short of disastrous.
But the other side is so impressive as to be incredulous. India is the second-largest English speaking nation in the world and has impressive numbers of highly educated and IT-savvy citizens. While most developing markets are export-oriented, two-thirds of the Indian economy is driven by domestic consumption. This dependence on the domestic economy is considered a plus by investors who seek an emerging market that is not correlated to worldwide swings.
In 2012, India’s economy experienced its worst slowdown in nearly a decade. At the end of the year, economic growth stood at 5.3 per cent. It also continues to grapple with graft, high inflation, high interest rates, policy inaction, and governance issues. But seemingly, these don’t matter.
On January 15, with foreign investors increasing their holdings of local shares amid government measures to revive economic growth, India’s Sensitive Index rose 0.4 per cent to touch 19,986.82 at the close, after surpassing 20,000 intraday for the first time since January 2011. India has opened up its retail sector to multi-brand foreign direct investment (FDI) and recent reforms continue to create hope that the Indian economy will grow in 2013 and take investors along for the ride.
We take a look at the sectors that are ripe for investment.
The equity market
While Morgan Stanley said in a recent report that the Indian stock market is likely to perform well in 2013, they also attributed it to the TINA factor — short for There Is No Alternative. In other words, while the Indian economy is not exactly praiseworthy, it is more attractive than that of the US or the EU as they undergo economic upheaval.
This, it explained in the October 2012 report, is the reason investors and foreign institutional investors (FIIs) continue to pour money into India. “Global investors argue that India is where they would like to put money to work, because other options do not seem attractive enough.”
Global investors are also attracted by opportunities in the Indian stock market because its fundamentals seem more stable. Indian companies are at the top because they exhibit steady growth in earnings, without too much variation, the report pointed out. The coefficient of variation is also low, which implies that earnings growth between all companies across the years is not that widely dispersed.
According to the report, “India has the lowest standard deviation of EPS [earnings per share] growth at 13 per cent. Over time, not only has earnings growth been comparable with that of the rest of the world, but the earnings stream has also exhibited markedly lower volatility.”
The global financial services firm believes that there are many stock picking opportunities in 2013, especially for passive investors. “India’s sectorial diversification seems the best across major emerging markets, with low standard deviation on sector weights and low degree of single-sector dominance. India’s standard deviation across sector weights remains one of the lowest across emerging stock markets.”
The rebound in Indian equities in 2012 has sparked univocal optimism that the momentum will be carried forward in the year ahead. In November, Goldman Sachs upgraded Indian stocks from market-weight to overweight, citing growth recovery and a likely moderation in inflation. The investment bank has pegged the December 2013 Nifty target at 6,600 points.
In December, PTI reported that the Indian stock market was the third-best global performer in 2012. “Indian markets have rallied over 25 per cent in 2012, supported by the government’s intent to back reforms, positive outlook by international brokerage firms on Indian equity markets, and global liquidity flows.”
The report said that overseas investors had made net investments of over $22 billion (Dh80.79 billion) in 2012 — despite slowing corporate investments and falling profit margins.
“India has one of the highest growth rates in the world in the face of a global slowdown. America and Europe are unlikely to recover in 2013. And compared to other BRIC nations [Brazil, Russia, India and China], India’s main stock market index was way ahead last year,” says Dr Bharat Butaney, President, Indian Business and Professional Council, Dubai.
“In the past, Indian stock markets have always been bullish in positive scenarios, and I believe we are at the foothills of a new bull market,” he says. “Investors have only three choices — India, India and India.”
Best performing bonds
It was a revolution of sorts in the debt segment of the Indian securities market that overseas investors bought a record $32.94 billion worth of bonds in 2012, spurred by higher investment limits and a weak currency. “Investments touched an all-time high of $32.99 billion on January 1, and have jumped more than fourfold since 2009,” Bloomberg reported.
“The inflow into debt has been high primarily because of the increase in ceiling on both corporate and government bonds,” Ashish Vaidya, Executive Director of Trading at UBS explained to The Economic Times earlier this month. “The fact that the interest rate cycle seems to be peaking is another important factor. Last year has also seen interest from sovereign wealth funds and central banks looking to diversify reserves or resources in India local currency debt,” he said.
International investors prefer Indian government and corporate bonds because yields are at least a few percentage points higher than in other emerging markets. Compared to the 2 per cent yield on government bonds of developed nations in the Eurozone and the US, Indian bonds yield approximately 8 per cent, after adjustment for currency risk. Bloomberg reveals that the benchmark bond yield in China is 3.59 per cent, in Indonesia 5.19, and in Russia about 6.91.
There is much optimism for 2013. On January 3, India’s ten-year bonds gained for a tenth day, the longest winning streak since November 2009, based on the belief that public finances will improve. India has deferred a debt sale to February, and bond investors are convinced that the government will stick to its borrowing target.
By March, ten government-owned infrastructure companies are expected to issue Rs535 million (Dh35.62 million) worth of tax-free bonds. Tax-free bonds are rated long tenure (usually 10-15 years) fixed income securities, offering annual interest at rates less than the yield of government securities of similar tenure. With ten-year government bonds currently trading around 8.2 per cent, pundits predict that the new bonds will offer 7.5-8 per cent.
Fund flows are also set to increase with a combination of unrelated factors: the Banking Amendment Bill, FDI in multi-retail and single brand retail, and changes in commodity and power exchanges, non-banking financial companies (NBFCs) and asset reconstruction companies.
“Dollar-based investors will earn 14.6 per cent, including interest income, from holding rupee-denominated assets by the end of 2013,” Bloomberg predicts, based on the median estimate of its survey and prevailing deposit rates.
Prime property
The year 2012 was one of the worst years for Indian real estate. The liquidity crunch, scaling down of residential projects, higher vacancies in retail and lower absorption of office space marred the year for the sector.
But 2013 promises to be much better. The government is expected to pass the Land Acquisition and Real Estate Regulation bills, and the Reserve Bank of India (RBI) to bring down interest rates. While the prime focus of realtors will be residential, several new opportunities are linked to FDI for retail space. Experts say that real growth is to be expected.
“The passage of FDI in multi-brand retail shows the government’s seriousness on reforms. The RBI can be expected to lower interest rates in the coming months, which will benefit both developers as well as consumers. This will boost sentiments,” Pranab Datta, Chairman of Knight Frank India, told the PTI news agency in a year-end review.
“FDI in multi-brand retail will boost the demand for commercial real estate. Apart from international brands, domestic brands are exploring opportunities to increase their footprints across the country. This demand is expected to bring upward movement in retail rentals, particularly along established hubs,” said Anshul Jain, CEO of property advisor DTZ India, in the same review.
According to Jones Lang LaSalle, major cities such as Mumbai, Delhi National Capital Region (NCR), Bengaluru, Chennai, Pune, Hyderabad and Kolkata will see the addition of close to 9.5 million square feet of mall space in 2013.
Meanwhile, the Credit Rating and Information Services of India (CRISIL) expects absorption of new residential units across six key cities — Mumbai, NCR, Pune, Bengaluru, Chennai and Hyderabad — to increase at a compound annual growth rate (CAGR) of 7 per cent to touch 251 million square feet in the next two years. It says Mumbai will record the highest CAGR of 14 per cent.
Anuj Puri, Chairman and Country Head of Jones Lang LaSalle India, predicted that most cities — apart from Bengaluru and Chennai — will see an increase in residential launches in 2013.
“We expect 2013 to bring a larger-than-usual number of NRI [non-resident Indian] investors into the commercial space arena. This is because NRIs are currently enthused by the prevailing exchange rate benefits and the fact that commercial real estate capital values are still 15-25 per cent under their 2007-08 peak levels,” he said.
Business Monitor International’s India Real Estate Report Q1 2013 remains ambiguous on pricing. “Many of our core convictions on India’s real estate market, such as falling sales volumes and rising inventory levels have played out, yet prices have yet to witness meaningful declines. The persistence of private equity financing goes some way to explain this unexpected phenomenon. However, as this funding starts to dry up, we believe developers will be forced to start slashing prices, or risk major solvency concerns.”
The shining metal
Mohit Kamboj, President of the Bombay Bullion Association, said at the Reuters Gold Forum in November he did not expect the government to further increase import duties for gold in the next budget, and also, India’s gold imports may fall to 550 tonnes in 2013, from a peak of 967 tonnes in 2011. But, he said, almost nothing will make Indians switch to other investments.
“In India, only a small percentage of people understand and invest in stocks and shares. Most of the people are not highly educated and still believe gold is the better option,” Kamboj said. “Most Indians, who have little access to a bank account, depend on gold for savings.”
Reuters interviewed several industry experts at the end of last year, and according to them, the demand for gold is expected to rise in 2013, based on an increase in jewellery purchases. Jewellery demand fell by 35 per cent as compared to 2011 because of higher import taxes and the weak rupee. The Indian government raised duties on gold imports to curb imports to $38 billion from $58 billion in 2011-12 as it seeks to rein in its current account deficit and encourage money tied up in gold back into the economy.
Shekhar Bhandari, Executive Vice-President of Treasury at Mumbai-based Kotak Mahindra Bank, has another take on the metal. He predicts that an increase in auspicious days for weddings in 2013 — a key factor driving gold jewellery purchases in India — will help boost demand by 25 per cent.
Some bankers said they expect the rupee to strengthen against the US dollar this year, which will make gold more attractive. “We should see recovery this year. We expect the rupee to strengthen, which will make domestic prices lower,” said Kamal Naqvi, Managing Director of Commodities at Credit Suisse.
FDI and PE
With the Indian government focusing on increasing the country’s share in the global FDI space from 1.3 per cent in 2007 to 5 per cent by 2017, it is expected that foreign majors will invest aggressively in various Indian markets.
The decision to allow 51 per cent FDI in multi-brand retail is expected to pave the way for retail giants such as Walmart, Tesco and Ikea to enter the Indian market and make significant footprints in the $450-billion retail industry. Moreover, the government has also relaxed sourcing norms for single-brand retailers and permitted them to buy at least 30 per cent of the goods from Indian industry, rather than merely from Indian SMEs (small and medium enterprises). In civil aviation, foreign carriers can now buy up to a 49 per cent stake in their Indian counterparts.
Furthermore, to sustain the momentum, the government is also considering a slew of complementary measures such as raising the ceiling for foreign borrowings, easing curbs on portfolio investors, and liberalising norms for overseas borrowings.
According to UNCTAD’s World Investment Report 2012, India is the third-most favoured destination for investment by major global companies, after China and the US. Indian markets, across all industries, are considered as viable long-term investment options, and the report anticipates that foreign investments in India could increase by over 20 per cent in 2012-13.
“Strategic investors have always liked India and continue to do so, as India is a huge consumption market, most sectors are underpenetrated and companies have strong growth potential, which have yielded huge returns in the past,” Sanjay Nayar, CEO and Country Head of private equity firm KKR India, told Business Standard at the start of the year.
“Private equity (PE) is a phenomenally important asset class for India and it is important to build a positive investment climate to override the macro headwinds, to make businesses feel confident about investing again. We will see a lot more demand for private capital in 2013. In that context, there will be a lot more investment opportunities to really build world-class companies, especially in the consumer-facing and infrastructure-related industries.”
Alluring art
Compared to other asset classes, art suffers many drawbacks as an investment vehicle. The volatility of art measured by the variance of returns is at least twice that of equities or bonds. In India, the art market is especially shallow, with relatively few buyers. It is also lopsided, with the meagre collector base of approximately 500 based in Mumbai or Delhi.
Despite these, it can be argued that art has entered the Indian investment portfolio. Three recent events also ensure Indian art’s place on the international investor’s radar.
On 17 January, Mumbai-based Pundole’s held a single-owner sale of works by India’s most famous artist, with a staggering hammer price of Rs16.85 crores. The auction featured over 145 lots by M.F. Husain dating from the 1940s to the 1970s, and only four of the more than 400 pieces remained unsold.
The on-going Kochi-Muziris Biennale is India’s first biennale, and also its largest contemporary art event. The event is scheduled to host 80 local and international artists, site-specific works, and a sustained education programme until mid March.
The fifth edition of the India Art Fair is scheduled to run from January 31 to February 3 and will bring together 105 galleries from 24 countries.
In November, art market research firm ArtTactic’s Indian Art Market Confidence Indicator increased by 10 per cent and stood at 57 at the end of 2012. Confidence in the contemporary Indian art market grew by 12 per cent from 39 to 44, and the Expectation Indicator for contemporary Indian art stood at 53, signalling a positive outlook for the market in the next six months. A total of 41 per cent of interviewed experts also felt that the Indian modern art market has recovered, or will do so within the next 12 months.
According to ArtTactic, the Indian art market showed the first signs of a possible turnaround in October, after six consecutive seasons of decline. Overall auction volume for modern and contemporary Indian art came in at $11.42 million, a 33 per cent jump from June 2012, and on par with the results from 12 months ago.
“With the Chinese contemporary art market showing signs of slowing down considerably since spring 2011, it is likely that collectors’ attention will start to gradually shift elsewhere, and we believe Indian contemporary art will start to regain lost ground, relative to its neighbours,” the online art research magazine predicts.
FDs and insurance
Indian banks have long offered high interest rates on long-term fixed deposits (FDs). For example, State Bank of India offers 8.75 per cent, and Union Bank of India 9.25 per cent for three years. FD schemes from Shriram Transport Finance and Mahindra & Mahindra Financial Services offer more than 10 per cent returns for the same period.
But experts say the RBI is expected to lower policy rates by mid year, which will result in banks slashing FD rates. Concurrently, media reports suggest that the Finance Ministry is nudging public sector banks to lower their FD rates, including special rates offered to senior citizens. The logic is that the reduced rates will spur economic growth. In this scenario, the experts advise creating new FDs at the earliest, to make the most of the current rates. Risk-averse individuals should also look at Senior Citizens Savings Scheme (SCSS) as an alternative, they suggest. Indian Post’s SCSS is currently among the most attractive, with an interest rate of 9.30 per cent per annum.
“Insurance is the only thing that provides the security that an individual or a family needs in times of exigency, along with much needed liquidity,” says Alok Kumar, Country Resident Manager of LIC International in Dubai. “Insurance is one of the options for investments in India — for anyone — and it now offers a variety of instruments ranging from children’s education to retirement, and medical and long-term care,” he explains.
The country’s largest life insurer has already launched two new products this year, and one of them is a unit-linked insurance plan called Flexiplus, with two fund options — debt and mixed. The mixed fund, with its exposure to equities, is ideal for risk-averse investors who are looking for an insurance-cum-investment plan.
