While Asia face big downside risks in the coming year, India is seen as the country best able to cope with a more protectionist US under Donald Trump, argue macroeconomic experts.
“The region’s structurally slowing economies, many of which are in a late-stage credit cycle, are vulnerable to more inward-looking US policies and high geopolitical uncertainties in Europe,” said Nomura in its Asia economic outlook, released yesterday.
Yet India has a number of factors working in its favour, such as strong reform momentum, the fastest forecast growth in Asia and a long list of well-managed companies. Hence it is better placed than other markets in the region to weather the coming turmoil, agree Nomura and Steven Bell, director of global macro at BMO Global Asset Management.
“An issue I have been concerned about is the ability of India to introduce really effective reforms, because vested interests have gotten in the way,” said London-based Bell. “But it looks as if [prime minister Narendra] Modi has found a way [to get past that].”
For instance, the move to ban large-denomination notes had a temporarily negative effect, but will be positive in the long term, he noted.
“It has forced a whole bunch of transactions out of the informal economy into the formal economy. That means there will be less tax evasion, less scope for corruption and a more efficient economy overall.”
An even more significant move, said Bell, is the proposed goods and services tax (GST). If introduced, it will be a tremendous boost to economic efficiency, he said.
Nomura agreed: “The government’s resolute progress on medium-term reforms, despite their short-term disruptive growth effects, fortifies our long-held positive stance on India.”
Such moves are laying the ground for a faster growth rebound in 2018, added the bank, which expects growth to be largely unchanged at 7.1% next year, but to rise sharply to 7.7% in 2018.
Things can only get better?
Another point in India’s favour is the fact that it has not historically had as close a relationship with the US as other countries in Asia, said Bell.
Countries such as the Philippines and Taiwan have traditionally relied on a US commitment to provide military protection. But they now face uncertainty over those links to America, he noted, in light of Trump’s promises to dilute its commitment to defend such nations.
India, on the other hand, has never had the same relationship, said Bell, so it has less to lose from change in the US administration, as it were.
“The India-US relationship has been a tricky one, and I don’t expect it to be as warm and close as with other countries in the region,” he added. “But as India becomes more self-confident and economically successful, I think it will become closer to the US from a business point of view.”
BMO Global AM has had a strong stock-picking bias to India over China, he noted, and that looks set to be the case for some years to come. “We can find lots of great Indian companies, but struggle to find strong Chinese ones.”
From a bottom-up perspective, the fund house’s emerging-market portfolios have been substantially overweight Indian equities and underweight China for at least two years. “The Chinese market has been very volatile,” said Bell, “so there have been periods that our positioning has cost us, but overall it’s been a good trade.”
As for China...
China, meanwhile, is among the Asian markets (including Korea, Malaysaia and Thailand) with weak or deteriorating growth and poor fundamentals, noted Nomura.
The country needs SOE restructuring, deleveraging and deregulation, said the bank. But these reforms hurt growth in the short run, which Beijing is unlikely to tolerate in a year in which politics will likely trump economics, with key leadership changes coming.
“We expect the government to do whatever it takes to achieve GDP growth of around 6.5%, but beneath the surface vulnerabilities are festering and we cannot rule out Beijing at some point losing its grip on the economy,” added Nomura. “Pressure points are accelerated capital flight, corporate defaults and rising inflation.”