Positive long term growth for Indian equities predicted despite inflation concerns

Long term growth prospects for Indian equities remain intact despite the impact of inflation and monetary tightening in the first quarter of 2011, it is claimed.

Indian Gross Domestic Product growth expected to be 7% to 8% as inflationary pressures are easing and the fact that India's reliance on crude oil is relatively low points to a positive long term outlook, according to a report from Fidelity International.

The country's structural growth drivers remain intact and bodes well for equities in the medium to long term, said Teera Chanpongsang, portfolio manager, Fidelity India Focus Fund.

‘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,’ said Changpongsang.

‘However, this trend seems to have reversed since early March, given the stronger growth and economic fundamentals in emerging markets. This dynamic has helped Indian equities to make a strong recovery,’ Changpongsang explained.

‘India is the only large global economy, besides China, that is expected to continue growing by high single-digit rate this year, 7 to 8%.  My belief is that this superior growth rate will continue to attract investors given a relatively lower growth expectation across many markets.’

However, inflation remains a near term concern for investors. ‘Inflation is a near term concern 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% to 8%. This is very attractive in the current global context,’ explained Changpongsang.

‘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% 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 larger economies, Chanpongsang pointed out. ‘Coal is the predominant source of energy in India (52.4%) due to its abundant availability. New oil and gas discoveries in recent years have ensured that dependence on imports does not rise with growing oil demand. The situation should improve as production in new oil blocks increases in coming years.’

While short term concerns may continue to dampen investor sentiment, Chanpongsang said that investors have reason to be positive as the economy is demand driven, steps are being made towards better governance and there has been an improvement in foreign direct investment.

The Fidelity Funds India Focus fund is positioned to benefit from structural growth in India.
The fund is overweight in 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 of 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 large firms are well diversified across product categories and are well positioned to leverage their large customer base when there is an increase in technology spending in western markets.