The Indian stock markets should perform well in the second half of 2022, even though most Asian economies might continue to struggle this year, a Singapore-based top business executive said on Tuesday.
"India has been an outlier as economic activity has been rebounding quite sharply. India's GDP growth forecast is projected to be 7 per cent plus for the year, making it the fastest growing major economy in the world," said Praveen Jagwani, CEO of UTI International.
Though the Foreign Portfolio Investment (FPI) outflows from India have exceeded $30 billion in the first half of 2022, reflecting a global risk-off view, Jagwani noted there has been an equal amount of injection in the equity market by domestic institutions.
"Thus the local sentiment about the economy remains strong, cementing the core belief in India's growth story. As a consequence of these relative flows, the aggregate FPI ownership of India's 75 largest companies is below 25 per cent for the first time since 2010.
"On the other hand, domestic mutual funds, institutions and individuals together own more than 25 per cent of these companies," he pointed out.
Interested retail investors
Jagwani, who has 28 years of experience of working in the global banking environment, further said, "In the last two years, retail investors have become increasingly interested in equities. The growth of start-ups and unicorns has captured popular imagination."
In a fast-growing economy, equities tend to be the most liquid asset class and provide the highest inflation-adjusted return. "Hence, we believe equities will be the fastest growing asset class in India," he said. According to the investment banking veteran, India has only three listed Real Estate Investment Trusts (REIT) covering 25 per cent of the organised office space in India.
"The REITs did not perform well during the Covid lockdowns and understandably so as the shift to remote working created uncertainty regarding the long-term demand expectation for commercial real estate," Jagwani said.
Post-Covid, the demand for office spaces seems to be normalising again. Even though the tech industry has moved to a hybrid working model, strong hiring in the sector has offset its impact on the demand, he said.
"With a dividend yield of almost 5-6 per cent, the overall expectation from REITs is that they will deliver a 15 per cent plus return in the next one year," Jagwani told PTI. Yet the bond markets are still hard to access for international investors, whereas investing in equities is much easier, he said.
Easy access to bond market
The relevant regulations for investing in India are Foreign Exchange Management Act (FEMA), Foreign Direct Investment (FDI) policy and Non-Debt Instruments (NDI) Rules. "As India becomes an increasingly relevant part of the global economy, investors will seek easy access to the Indian bond market," Jagwani said. Citing an EY report, he said India is expected to attract $120-160 billion of FDI per year by 2025.
Last year, the US and Japan were amongst the top five countries in terms of FDI equity inflow, cumulatively investing approximately $12 billion in India. Europe, the Netherlands, the UK, Germany and Cyprus were the biggest investors with an investment of $7.3 billion.
"China has also been a large investor but due to data privacy concerns, its FDIs are subject to much higher scrutiny," Jagwani said. He said he also sees robust business activity on the ground as evidenced by many economic indicators like PMI, Goods and Services Tax collections and credit offtake etc. Even forward guidance of future earnings is quite optimistic, he added.
Jagwani noted that post the shadow banking crisis in India in 2018, several sweeping reforms were introduced to strengthen the banking, financial services and insurance (BFSI) sector in the country. Consequently, asset quality improved and bank balance sheets are now in much better shape.
"All major private banks have posted excellent results with double-digit growth year-on-year and in net profit while maintaining stable asset quality. "The future outlook also remains positive with the increasing penetration of financial services," he said.
‘Internationalisation of Rupee — a landmark step’
Jagwani said the recent move by the Reserve Bank of India (RBI) towards internationalisation of the rupee is a landmark first step towards improving the current account deficit and reducing currency risk for India. The Ukraine crisis has offered India an extraordinary opportunity to further this agenda.
"A rise in demand for the rupee on a global scale would reduce demand for dollars in the long run. Eventually, this would diminish the depreciation pressure on the rupee and help preserve the country's forex reserves," he said. "A gradually weakening rupee certainly boosts our export competitiveness in the global markets," he said.
Sectors like IT, pharma and chemicals that earn considerable export revenue are direct beneficiaries of the weakening rupee. But there is a flip side to this as a consistently weakening rupee can erode investment returns and can be considered a red flag for potential investors, Jagwani said.
"Thus the move for settling international trade in bilateral currencies could be a boon for India," he said. "This year the Indian rupee has outperformed Yen, Sterling and Euro against the US dollar despite the downward pressure exerted by FPI outflows, rising energy prices and rising Fed rates," he said.