India should be one of the growth engines in 2011 for both Asia and the world according to the latest Strategic Focus study published by Bank Sarasin's Research team. Nonetheless India will not escape the global economic downturn that is expected in 2011. Consumption and capital expenditure remain the key drivers of growth while it continuing robust domestic growth could cushion the Indian economy from weaker exports. The Indian economy will have a soft landing in 2011 with growth to fall back to 7.5 to 8.0% in 2011 from 8.5 to 9.0%.
The Sarasin Group is incorporated in India as Sarasin Alpen India Private Limited which is a Non Fund Based Non Banking Financial Company” (NF-NBFC) with offices in Mumbai and New Delhi. The entity provides financial advisory and consultancy services to wealthy private clients in India and distributes select prime third-party products such as mutual funds.
Upswing in India is losing momentum
Since economic growth in India was supported by robust domestic demand in the 2009 global recession, the upturn in 2010 was less spectacular than in the heavily export-oriented economies such as Singapore and Hong Kong. As in pre-recession years, investment remained the key driver for the economy: historically low interest rates and a huge need for investment in India's still underdeveloped infrastructure ensured buoyant investment activity. In 2011, Bank Sarasin expects that Indian foreign trade will feel the effects of the slowdown in global economic activity. This will also have an impact on the domestic economy in India because despite the strong domestic sector the confidence of Indian companies remains based on the global cycle. Given the huge gaps in Indian infrastructure, investment will again make a positive contribution to growth in 2011. Overall, consumption should be the main growth driver and will cushion the downturn in 2011.
Philipp Baertschi, Chief Strategist, Bank Sarasin & Co. Ltd, Switzerland
“Our outlook for India in 2011 provides a good overview of the opportunities offered by one of the world’s largest countries as well as the challenges that it faces. Although India's potential is not in dispute, how it faces the two main challenges – Education and Infrastructure – in the medium term will be crucial. We are optimistic for the Indian equity market in 2011 and expect an upside potential of 15% to 20%. The equity market valuation is high but justified by the superior earnings growth. Investors that are able to ride out strong fluctuations should be rewarded.”
Indian growth below 8%
Bank Sarasin expects global economic growth to slow in 2011 which is also likely to weigh on the Indian GDP. This decline in the leading indicator points to industrial output growing by 6.0% to 8.0% in 2011. The correlation between industrial production and GDP growth in turn hints at economic growth of some 7.5% to 8.0% in 2011. The expected growth in India is therefore lower than the average rate of about 9% over the last few years.
Focus on debt reduction
Compared to other emerging nations, India's debt is very high. Given the recent strong growth, India will succeed in reducing its debt significantly. In the medium term, however, Bank Sarasin expects India to find it hard to reduce its debt as it will require government funds to build up its infrastructure. India will need to achieve a balance between debt reduction and infrastructure expansion.
Indian rupee in 2011
The Indian rupee is undervalued so the Indian central bank will permit a gradual appreciation. From a valuation perspective, the Indian rupee offers an attractive investment opportunity. However, in the short term it fluctuates very strongly and usually suffers heavy losses when risk aversion rises in the financial market. Nonetheless losses should be limited in 2011 as the economic risks have fallen considerably in recent months. It is therefore expected that there will be no massive rise in risk aversion and the environment for the Indian rupee should be good in 2011.
Double-digit return expected in Indian equity markets
The report is optimistic for the India equity markets in 2011 and expects an upside potential of 15% to 20%. However, given current high valuations, upside potential is limited and the Indian stock market is therefore unlikely to outperform the emerging markets overall. But investors that are able to ride out strong fluctuations should profit from exposure to Indian equities as India will be able to maintain above-average earnings growth in the coming years thanks to the positive growth momentum.
India’s important role in the new equilibrium
Bank Sarasin expects that western deficit countries will have to raise their savings rates in the future leading to declining consumption growth in these countries. This means that surplus nations will lose their most important export markets and have to turn increasingly to domestic consumption. This form of «global rebalancing» is not without risks. A situation could arise in which the deficit countries have to reduce their consumption while the surplus countries are not prepared to shift from export-driven growth to more domestic consumption, potentially leading to a global shortfall in demand. Bank Sarasin’s analysts highlight that India can play a key role in this new equilibrium as India is one of the few countries whose growth is not based on exports and whose consumption is also not excessive. On the contrary, strong population and income growth forms the basis for strong consumption growth in the coming years. Accordingly, India will assume a key role in the global rebalancing process as it can offset lower demand in the traditionally high consumption western countries.
