Thursday, February 22, 2018

Election euphoria: India, Brazil outperform

This week, we at Bourse highlight the outperformance of India and Brazil’s equity markets, discuss the outlook for these Emerging Markets and present avenues for investors to gain exposure in these markets.

India’s Recent Development & Market Outlook

As at May 28th 2014, India’s 30-stock equity index, the Sensex, returned investors 22 per cent USD equivalent upside (See Exhibit 1). This return was fuelled by investors’ optimism of a change in government in the run up to India’s Lok Sabha elections 2014. On May 16th 2014, India voted in a new government led by the BJP party. With confirmation of these changes in the political landscape, the Indian equity market seems poised to climb even higher to year-end 2014. Both international and Indian investment houses forecast an uptick in economic activity, as the new governing body is expected to dismantle some of bureaucratic gridlock of Asia’s third largest economy.

The BJP party’s decisive win gives the new government a decree to advance reforms which had stalled under the previous government alliance. Capital expenditure and formation, a key ingredient to the acceleration of GDP, is expected to ramp up with investors anticipating a catalyst to the investment cycle.

The positive outlook on India has also been propelled by an improved earnings outlook, particularly for the domestic sector. Investment Houses are expecting that the new government will announce steps toward restoring India’s long term GDP growth trajectory and a manufacturing turnaround in the upcoming budget. As such, research houses have increased year end targets for the India’s equity market. Exhibit 2 shows, on average, international houses projections for India’s main equity Index, the Sensex, to move from its current level at 24,500 to 27,000 by December 2014 year end, an estimated appreciation of 10.2 per cent (targets derived from four major international investment houses).

One often-used measure of confidence of the Indian market is Foreign Institutional Investor (FII) fund inflows. Since the beginning of the year, US$18.8b has been pumped in Asian equities with over 40 per cent or US$7.7b finding its way into Indian markets. When compared to 2013 comparable period, FII injected US$14b into Indian equities pushing the market up 1.4 per cent in USD terms whereas the market is up 21.7 per cent as at May 28th 2014. FII inflow is predicted to advance further, as sectors are opened up for more foreign investment under the new perceived business friendly administration.

USD/Rupee regaining strength

As at 27th May, 2014, the rupee was INR59.04, an improvement from INR 61.80 at the beginning of 2014, a 4.5 per cent appreciation (See Exhibit 3). One of the major factors boosting prospects for the Indian rupee was the positive data on the current account deficit (CAD) along with the fiscal deficit. India’s third quarter CAD narrowed sharply to $4.2 billion, or 0.9 per cent of gross domestic product (GDP), from $31.9 billion, or 6.5 per cent of GDP, in the same period one year-ago. FII inflows and the ensuing demand for the rupee have also contributed to a stronger rupee. The outlook for the rupee is to be range bound between INR 58 and INR60 in the short term.

Will Brazil follow suit?

For the first five months of the year, Brazil’s primary index has experienced a significant rally of approximately 7.8 per cent year-to-date, one of the highest among major emerging markets (see Exhibit 1). For the comparable period last year, the index had declined by 7.5 per cent in USD terms. The main market catalysts continue to be local currency appreciation, a likely pause in the monetary tightening cycle, deferred risks of energy rationing and improved sentiment regarding the future political landscape.

Since the start of the second quarter 2014, Brazilian markets have been increasingly responsive to the changing political outlook surrounding that country’s the impending presidential elections in October 2014. The market rally was in part attributed to President Dilma Rousseff’s loss of popularity in the polls, leading investors to expect a change in government policies toward a more accommodative and market friendly stance.

Whilst India’s Opposition Party gained popularity many months before the elections, Brazil’s incumbent continues to command the majority lead among the other two main contenders, who have promised more investment-friendly policies.

Tension and volatility surrounding the upcoming elections seem to be fuelled by the issues that continue to impact the Brazilian economy. Brazilians are displeased with the level of extravagant expenditure on the World Cup when social and infrastructural projects remain unfinished, along with slowing GDP growth, inflation and cooling commodity prices in a commodity-driven economy.

Currency & Outlook

The Brazilian Real has appreciated 6 per cent from BRL 2.3621 at year-end 2013 to BRL 2.2294 year-to-date, on the back of improving sentiment toward emerging markets and the use of currency stabilization measures by the Brazil’s Central Bank (See Exhibit 3).

In order to combat rising inflation, the Central Bank has consistently raised interest rates since April 2013. The most recent inflation figure of mid-May 2014 stands at 6.31 per cent which is still within the Central Bank’s upper inflation target of 6.5 per cent. The key interest rate, which currently stands at 11 per cent, is expected to remain unchanged until after October presidential elections. An end to the rate hikes would likely spur foreign investment and business activity. Investors can still squeeze some real returns from the Brazilian economy as the interest rates remain ahead of inflation, whereas by comparison in the Trinidad and Tobago market, inflation erodes returns in this low interest rate environment.

Finance Minister Guido Mantega expects growth to accelerate in 2015 and 2016 due to upcoming road and airport projects and the 2016 Summer Olympics to be hosted in Brazil. Political change, which some would argue would be for the better, will likely serve to boost global investor confidence and by extension the capital markets of this South American giant.

There are several channels through which investors can participate in these markets’ uptrends.

• Purchase external ETFs focused on these investment jurisdictions.

• Acquire a portfolio of equities through your Broker, to reflect exposure to these regions.

• Purchase or invest in locally domiciled mutual funds, offered by various mutual fund providers including Bourse, which provide exposure to India and Brazil.

For more information please contact Bourse Securities Limited, at 628-9100, email us at