Cyclical recovery in India is gathering steam and will get a big boost from the fall in interest rates, the benefits of which are yet to percolate through the economy, according to experts from HSBC Global Asset Management.
On February 8, the Reserve Bank of India surprised the market by keeping rates on hold at 6.25% and changing its policy stance from accommodative to neutral, despite calls for the central bank to support economic activity following the demonitisation shock.
The government’s actions have been supportive and decisive, though not always implemented as expected.
‘We are overweight industrials which we expect to slowly benefit from the pick-up in investment cycle. The portfolio has moved from underweight to neutral on the real estate and consumer staples sectors with the recent price correction in these stocks making them relatively more attractive,’ said Nilang Mehta, senior investment analyst, Asian equities.
‘In financials, we favour private banks with exposure to the infrastructure sector and select well-capitalised public sector banks.
‘We are also exposed to housing finance companies which are likely beneficiaries of the union budget’s focus on affordable housing.'
Regarding different sectors, while some consumer staples stocks were adversely affected by the currency ban, the impact is estimated to be one-off and transitory in nature and expected not to extend beyond the January-March 2017 quarter.
On the other hand, Mehta said, consumer discretionary companies held strong, even in the previous quarter, indicating that the shift from unorganised to organised sector is already underway in some segments.
‘Going forward, we expect the shift to formal economy to hasten, driven by policy focus on incentivising and stimulating digital transactions,' Mehta said.
‘Consumer lending picked up in the period following November 8, as evidenced by the growth in the retail loan books of Indian banks. The uptick was led by unsecured personal loans, automobile loans and credit cards.
‘We continue to remain overweight consumer discretionary names that will benefit from lower lending rates and improving urban incomes.’
Given the inflation target, we expect policy to be on hold for the near future, at least till the Monetary Policy Committee sees the outcome of the monsoon, which is a factor for food inflation, according to Gordon Rodrigues, head of Asian rates and FX.
‘We expect government bond yields to be range bound. State government bonds could see an increase in supply and spreads could stay supported at current levels of 75bps over government bonds,' Rodrigues said.
‘From a strategy standpoint, while we continue to be overweight in government bonds, we have reduced duration by trimming holdings in the 15Y+ segment and switching into the belly of the curve.
‘We are overweight liquid and high quality Indian rupee corporate bonds as they provide additional carry under the current stable interest rate environment. We also continue to be underweight in US dollar bonds given expectations of Fed rate hikes.’
The budget overall is generally positive for the INR, given positive equity market reaction, Rodrigues said.
‘We expect the INR to move in line with the Asian currencies and to remain range bound going forward given improving fundamentals and strong FX reserves.
‘Over the long term, INR continues to look attractive, as India’s current account deficit is expected to remain relatively narrow and is well supported by increasing foreign direct investment inflows.’