Aberdeen is bullish on Trump-proof India, despite Modi’s note-ban drive

A man displays the new 2000 Indian rupee banknotes after withdrawing them from State Bank of India in Agartala, India November 11, 2016. REUTERS/Jayanta Dey

Mumbai: India trailing Spain on the sovereign ratings tables makes no sense to Aberdeen Asset Management Plc, which calls the delay in acknowledging the Asian economy’s improving outlook staggering.

With India “isolated” and less threatened by possible protectionist measures by US President Donald Trump, Aberdeen is overweight on the country and its local companies, said Hugh Young, the firm’s Singapore-based Asia managing director, who helps oversees assets of $400 billion.

“We are not in wait-and-see mode anymore,” Young said in an emailed response to questions. “Even though it is still relatively early days, the economy has transitioned, we are already seeing significant improvement and the groundwork has been laid for even stronger performance ahead. To not acknowledge that the outlook has improved is staggering.”

Prime Minister Narendra Modi’s government has pushed through a slew of reforms from amending archaic bankruptcy rules to allowing more foreign investment and readying a nationwide sales tax. While a recent move to demonetise some high-value currency notes has slowed the economy, analysts still forecast a 6.8% expansion this fiscal year, among the fastest for major economies.

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Aberdeen’s $7.7-billion Emerging Market Fund has the highest allocation weighted to India compared with other countries and counted mortgage lender Housing Development Finance Co. Ltd (HDFC) and consumer company ITC Ltd among its top 10 holdings as of 30 December, data compiled by Bloomberg show. The equity fund returned 27% to investors in the past year, beating 61% of its peers.

“This is a reflection of the quality and value of the underlying companies,” Young said. “From a fixed-income point of view, we remain particularly bullish on India.”

Trump exit

Still, foreign investors have been net sellers of Indian shares in nine of the last 11 weeks through 18 January since Trump was elected amid speculation his spending plans will prompt the Federal Reserve to raise interest rates at a faster pace. Higher rates in the US reduce the allure of emerging-market assets.

The selling was intensified by Prime Minister Narendra Modi’s 8 November decision to invalidate 86% of India’s currency in circulation in a clampdown on tax evasion and undeclared wealth. The unexpected demonetization drive rattled businesses in an economy where 98% of consumer transactions are done in cash.

The Modi government has been lobbying global agencies to lift India’s sovereign rating from the lowest investment grade, citing the introduction of simpler tax and bankruptcy laws, easing inflation and a pledge to narrow Asia’s widest budget deficit. Higher ratings may help India attract more foreign investors, lower borrowing costs and accelerate growth.

Moody’s Investors Service rates India at Baa3, while both S&P Global Ratings and Fitch Ratings rate it at BBB-, the lowest investment grade.

Lower debt burden

Moody’s, which raised the nation’s outlook to ‘positive’ from ‘stable’ in 2015, wants more before considering an upgrade, including a “sustainable” reduction in the government’s debt burden, said William Foster, its vice-president of sovereign risk.

“We are not looking at any particular reform in isolation, but at the totality of reforms and their overall effectiveness on achieving sustainable investment-led growth and more favorable government debt dynamics,” Foster said.

Fitch’s assessment of India is based on its higher public-debt burden, said Thomas Rookmaaker, director the sovereigns and supranational group, with the company, which last month upgraded its outlook on Indonesia to positive.

Aberdeen’s Young doesn’t agree.

Spain has a better credit score from all three companies despite a higher debt-to-gross domestic product ratio, as does Italy, which is rated above India by two of the three assessors.

“As usual it looks like the market is well ahead of the rating agencies on this one,” Young said. “Demonetisation has been a bit clumsy and certainly has dented growth in the short-term but this shouldn’t affect longer-term prospects. India deserves an upgrade.”