The USD/INR spiked to an all-time high of 68.80 in August last year as worries over deficits and foreign funding undermined the Indian currency.
Measures were put in place to contain the slide and at end of December the USD/INR closed at a 61.80.
The volatile ride left many investors heading for the exit and those who remain still have plenty of issues to contend with, not least of which is the ongoing currency risk.
Richard Titherington (pictured left), CIO at JP Morgan Asset Management and head of its emerging market equity team, says managing currency risk is key for equity investors in emerging markets.
‘We’re trying to earn returns for our investors in USD, so clearly currency weakness is something we worry about,’ he says. However, there are ways of turning the situation to your advantage.
‘When we expect currency weakness, we try to own equities that benefit from that. The great advantage of equity over bond markets is you can find weak currency beneficiaries. So stocks like software companies actually benefited from the currency fall,’ says Titherington.
When it comes to the outlook for the rupee the Reserve Bank of India (RBI) has fundamental role to play and all eyes will be on the new governor Raghuram Rajan.
Huzaifa Husain (pictured left), head of equities at Pinebridge Investments, believes the RBI will deliver: ‘I think RBI is well prepared to handle it. Nevertheless, the biggest risk it faces is high inflation coupled with the deteriorating asset quality of banks. At such times, even a small bit of bad news globally can have a disproportionate impact locally.’
Rahul Chadha, co-CIO at Mirae Asset Global Investments (HK), has a similar view on the Bank’s capabilities: ‘The taper scare in June and the start of the taper in December gave the central bank time to prepare by raising rates, cooling the economy and letting the currency depreciate.
‘Subsequently the current account deficit became more manageable, so given higher reserves we expect much less volatility from the rupee than we saw in the middle of 2013.’
This year India holds its federal elections, which will see the incumbent Indian National Congress (INC) up against the Bharatiya Janata Party (BJP).
Titherington says the result will not affect his sentiment on the market: ‘The election will, almost regardless of the outcome, produce a more effective government than the one we’ve had in the last few years. I don’t think its anything to worry about and I won’t be negative on the market because of it.’
Husain takes a similar position: ‘The variability of decision making between probable election outcomes is much smaller than what one
would have imagined a few months ago. This is because all political parties have realized the importance of good governance in winning elections thereby sustaining their own political futures.’
However, Chadha is more wary around issues such as the bureaucracy that characterises the country’s government.
‘It is important which party takes control of India’s government because we’ve seen a lot of policy inertia leading to businesses putting investments on hold. We’d like to see a good decisive mandate either by a pro-business opposition-led government or the existing government coming to power with a fresh perspective and leadership,’ he says.
The convergence of politics and economics is vital to the stability of Indian markets, and here the credibility of the central bank will be critical, says Titherington.
‘Rajan has been hawkish and I have quite a high degree of confidence in his management of Indian monetary policy. From a foreign investor’s perspective, you want to have confidence in the central bank to manage monetary policy appropriately, whether that’s tightening or loosening,’ he says.
Poised for recovery
On the subject of portfolio positioning, investors are split on which sectors are likely to benefit first from any economic uplift. Chadha favours financials: ‘We like private sector banks, which are growing strongly while taking market share away from public sector banks. If we see a correction from the elections, financials would be among the first to rerate.’
Meanwhile Husain has chosen to sit out financials for now, and believes that industrials and materials sectors provide better prospects for returns as the investment cycle picks up. ‘We are overweight materials and industrials. We are underweight financials and energy because of non-performing loans and lack of clarity in policy for the energy sector respectively,’ he says.
This article originally appeared in the March issue of Citywire Global magazine