The outcome of the US election was certainly a surprise for global markets. Stock prices globally went into free fall as the likelihood of a Trump victory increased. Once investors began to grasp the policy implications of the Republican victory the markets responded more positively. Any such event of significance is likely to result in majority of investors liquidating on fear and worrying about consequences later.
However, a much more profitable exercise would be to assess the longer-term implications for investment markets. Given our focus and putting our longer-term fundamental hat on, we look to assess the impact of Trump’s victory on India’s growth and its corporates.
US ELECTION IMPACT ON INDIA’S ECONOMY
Whilst there are no immediate impacts on the India’s strong growth trajectory, there remains significant political uncertainty surrounding President Trump’s policies, particularly regarding trade agreements with the rest of the world. The Asian region has been a major beneficiary of US policy bias toward free trade. An uncertain trade environment could have a dramatic impact on Asia’s export-oriented economies. Unlike other Asian or other emerging market countries (e.g. Brazil, Mexico) that rely heavily on global and intra-regional trade, India is relatively immune to large swings.
Chart 1: The Potential Impact of Trump’s International Trade Policy
Source: Bloomberg
Furthermore, unlike China and many other Asian countries, India’s GDP is heavily driven by private consumption. In fact, household consumption is 59% of GDP compared to China’s 36%[1], compounded by favourable demographics and urban migration. Therefore, the sensitivity of India’s GDP to global growth is relatively low, providing some insulation from economic uncertainty. he President-elect of the United States, has said in the past that India-US ties will have a “phenomenal future”
What sectors are likely to be impacted?
The Indian IT industry makes about 60% of its US$146 billion revenue from outsourcing to companies based in the US. Donald Trump’s rhetoric highlighted that the H-1B visa program (a non-immigrant, temporary working visa of which almost 80% of the take up is from Indians) is ‘unfair’, which may have implications for these businesses. If reforms to the H-1B visa system see minimum wages going up for foreign workers, Indian IT companies may have to pay higher wages and this could impact margins.
Whilst originally the outsourrcing story was about labour cost advantages of employing Indians at cheaper prices, it has evolved to be more about innovation, efficiency and intellectual property which has improved the profitability of several US corporates. We expect Trump, who promotes the use of skilled labour, to take the value addition of Indian IT firms into consideration and for there to be a long lead time before impact, if any, on Indian IT firms.
Indian pharmaceutical companies comprise the largest set of generic drug suppliers to the US, accounting for as much as 40% of the supply of such medicines[2]. Interestingly, unlike much of his other offshore policies, as part of his seven-point health care agenda, Trump stated that he would allow consumers access to better drugs made abroad. This would be favorable to many Indian generic drugs producers.
Chart 2: Companies with a significant exposure to the US.
|
Name |
Industry | %Revenue from US |
Index Weight |
|
Infosys |
IT Services | 62.7% | 8.0% |
|
HCL Technologies |
IT Services | 54.9% | 1.9% |
|
TCS |
IT Services | 53.3% | 4.9% |
|
Dr Reddy’s Laboratories |
Pharmaceuticals | 53.0% | 1.7% |
|
Sun Pharmaceuticals |
Pharmaceuticals | 52.8% | 3.1% |
|
Wipro |
IT Services | 50.1% | 1.2% |
|
Lupin |
Pharmaceuticals | 42.3% | 1.5% |
Source: Bloomberg, Company Financial Statements
FINANCIAL MARKET IMPLICATIONS
The main transmission mechanism for this bout of political uncertainty is likely via the foreign exchange and equity markets. Across Asia, market performance in each country would most likely be determined by the relative dependence on global trade, levels of indebtedness, current account deficits and reliance on foreign inflows. In the past, India relied heavily on foreign inflows to fund its deficits. However, with a stable currency backed by strong FX reserves and a robust central bank, we feel India is in a much better position to withstand any repatriation of capital. In fact, since India is one of the bright spots in an increasingly uncertain world, it may attract foreign capital and investment at the expense of some of its Asian and emerging market peers.
PORTFOLIO IMPLICATIONS
As mentioned earlier, countries that are more domestically insulated and rely only mildly on exports and trade, are likely to fare better in this period of uncertainty. This bodes well for our portfolio, which is intentionally positioned to provide investors exposure to domestic growth in India. Some of the key characteristics of the portfolio are:
- Approximately 70% of the revenue generated by companies in our portfolio are derived domestically;
- High conviction exposures to strong earnings growth companies;
- Low turnover and a long-term biased portfolio
- Significant exposure to private sector banks, auto manufacturers, pharmaceuticals and selective technology related companies
OUR VIEW
Investment markets are primarily driven by both fundamentals and sentiment. In the short run, sentiment tends to drive stock prices, but give way to fundamentals as the driver of long-term investing. In times like this, it is our view that staying the course is paramount.
There is significant uncertainty regarding the implementation of all of Mr Trump’s political views. An environment of heightened political risk and low growth environment is unlikely to subside soon. The team at India Avenue believe such times typically cause irrational investor behaviour which is detrimental to the achievement of long-term objectives. We believe India’s long-term growth path remains intact given the country’s strong fundamentals, being its macro and microeconomic tailwinds. We advocate an actively managed portfolio to navigate structural changes in the environment.
[1] http://databank.worldbank.org/data
[2] Trump victory to maintain status quo for Indian pharma, Forbes India, Nov 9, 2016
India Avenue is a boutique investment management firm providing investment solutions that allow our clients to benefit from India’s remarkable growth story.
OUR BUSINESS
2005
The journey towards the “birth” of India Avenue originated in 2005, when ING Investment Management started a business in India as a separate division, utilising a practiced multi-manager philosophy in markets like Australia, and exported it to India. Three of our founders, Mugunthan Siva, Rajeev Thakkar and Sajjan Raut Desai worked together for INGIM (India), building investment strategies and structures, under this philosophy and applying them to Indian capital markets
2011
In 2011 our founders started discussing the possibility of building an investment firm with a capability to provide a focus on India as an stand-alone investment jurisdiction for foreign investors. The founders identified Australia and New Zealand as nascent markets for investing in regional locations, with the potential to accelerate given education and insights which the firm could provide.
2015
By 2015 the group of founders decided to work full-time on this concept to bring it to life. They did this by leaving their existing employment, thus exercising high conviction in the investment region of India as a long-term structural story for investors in Australia and New Zealand. Thus, the firm India Avenue Investment Management was registered and came to life in 2015 in Sydney, Australia.
2016
After building our business for a period of 12 months, our first fund, The India Avenue Equity Fund was launched on 6th September 2016, with strong service provider partners like Equity Trustees (RE), Mainstream (Fund Administrator), KPMG (Fund Auditor) and BNP India (Custodian).
NOW
India Avenue is now a boutique investment business firm, with clients spread across family offices, high net worth individuals, wealth advisers and financial planning firms. Our firm has focused on education and knowledge as a driver of investment behaviour and have taken a long-term approach towards Australian and New Zealand investors contemplating an allocation to India’s growth as part of their portfolios. Our firm has assets in excess of A$50m and the India Avenue Equity Fund is rated “Recommended”* by Lonsec and is available on multiple investment platforms across Australia and New Zealand.