Main financial assets discussed: Emerging market stocks, Indian stocks, iShares MSCI India ETF (INDA), iShares MSCI India Small-Cap ETF (SMIN), WisdomTree India Earnings Fund ETF (EPI)
Top 3 key points:
1. Emerging markets have outperformed all other global sectors, including the United States, since the late 1980s.
2. Emerging markets are currently undervalued compared to the U.S. market, making them an attractive investment opportunity.
3. India is a particularly promising emerging market due to its balanced economy, improving standards of living, and strong demographic advantages.
Recommended actions: **Buy** India Small Caps (SMIN) ETF.
### Summary
India's retail inflation in July rose to 7.44%, higher than market expectations, and is expected to remain elevated in Q3. The global currency market is experiencing significant turbulence, with the USD appreciating despite economic weaknesses. Heightened inflation and volatility in the currency market pose risks to the Indian market.
### Facts
- India's retail inflation in July was 7.44%, exceeding market expectations.
- Elevated inflation is expected to continue in Q3.
- The global currency market is experiencing turmoil, with the USD appreciating despite economic frailty.
- FII outflows have increased, but India's equity market is performing better than other emerging markets.
- The RBI has revised its inflation forecast upward and expects inflation to decrease to 5.7% in Q3.
- High interest rates and inflation are expected to impact corporate earnings growth and valuation.
- India's one-year forward P/E valuation has decreased from 20x to 18.5x.
- Bond yields have increased, leading to a divestment of equities and acquisition of bonds.
- The domestic market is supported by restrained FII divestment, robust purchasing by DIIs and retail participants, and outperformance compared to other emerging markets.
- Selling in global equities has increased due to concerns of deflation and defaults in China's realty and finance sectors.
- The author expects the selling from FIIs to continue in the short-term due to elevated global bond yields, US credit downgrade, and slowdown in emerging markets, but India will continue to outperform.
- In the last month, the MSCI World index was down 4.2% compared to MSCI India's 1.85% decrease.
India's sovereign credit rating, currently at the lowest investment grade, should be upgraded due to its status as the fastest-growing economy and its potential to become the third largest economy in the world, according to Madan Sabnavis, Chief Economist at Bank of Baroda. He highlights the importance of a good credit rating and emphasizes that India is an attractive destination for foreign investors. Sabnavis believes India deserves an upgrade to at least an A rating.
Foreign portfolio investment inflows into the Indian markets slowed down in August due to concerns about rate hikes in the US, resulting in higher bond yields and a stronger dollar, but India remains an attractive market for investors compared to other emerging markets.
India's economic rise is seen as inevitable due to factors such as a consumer boom, context-appropriate innovation, a green transition, a demographic dividend, access to finance, major infrastructure upgrades, policy reforms, geopolitical positioning, and a diaspora dividend, although challenges such as unbalanced growth, unrealized demographic potential, and unrealized ease-of-business and innovation potential still need to be addressed.
India's record stock market valuation and increasing foreign inflows are positioning the country as a safe and attractive investment option, especially amidst the economic troubles and struggling financial markets of its neighboring rival, China.
Investors may want to gain exposure to emerging markets in 2023 due to their high growth potential, the potential for diversification and offsetting of FX impacts, China's policy shifts supporting growth, the ability to compound returns through dividends, and the potential reversal of the MSCI index.
With the right reforms, India has the potential to become the next engine of global growth, benefiting from major economic re-alignments caused by China's slowdown and the US diversifying its supply chains. Major corporations are already investing in India, recognizing its potential. However, India needs to overcome challenges such as high tariffs, infrastructure improvements, and regional cooperation to fully realize its manufacturing potential and attract foreign investment.
The Indian government bond market is set to receive significant foreign fund inflows and experience a lower yield curve after JPMorgan announces the inclusion of India's sovereign bonds in its emerging markets index, potentially resulting in inflows of $40-50 billion in the medium term and lower borrowing costs for the economy.
India's inclusion in JPMorgan's emerging market debt index is expected to lead to billions of dollars of inflows into the country's economy, helping it finance its deficits and raise its standing in international financial markets.
The Reserve Bank of India is expected to buy dollars and sell bonds in order to manage the liquidity and forex impact of India's inclusion in global bond indices, according to JPMorgan's head of emerging market economics.
The world's biggest bond markets are experiencing a selloff as higher interest rates become the new norm, which has implications on government borrowing costs, global financial markets, and emerging economies.
India's inclusion in JPMorgan's emerging market bond index signals major changes in the global capital markets, boosting capital inflows by $20-25 billion and improving liquidity for Indian assets and the rupee, ultimately attracting more investment. India's rise in the global economy will have significant consequences, positioning it as a nonaligned player and surpassing China in certain measures, while ongoing disputes with Pakistan and China continue to shape its geopolitical landscape.
The recent surge in global bond yields, driven by rising term premiums and expectations of higher interest rates, signals the potential end of the era of low interest rates and poses risks for heavily indebted countries like Italy, as well as Japan and other economies tied to rock-bottom interest rates.
