Insurers identify key factors to watch while investing in India in H2
From monetary and fiscal policy and bond inclusion in global indices to monsoon predictions, there is a lot that international and domestic investors in India will be monitoring over the next few months, two senior executives from India's insurance industry said.
With stock markets resuming their meteoric climb after parliamentary elections, focus is now shifting back to economic fundamentals -- and that India offers one of the best structural growth plays in the region.
First up for consideration is monetary and fiscal policy.
“The timing and extent of rate cuts which it would like to do may have an impact on the markets even though they may not be significant as rate cuts are expected to be shallow in India,” Ajit Banerjee, CIO of Hyderabad-based Shriram Life Insurance, told AsianInvestor.
Shriram Life Insurance, a joint venture between India's Shriram group and South Africa's Sanlam group, has about $1.3 billion in assets under management (AUM).
Shriram group is an Indian non-banking financial services provider with about $34 billion in AUM.
Other industry participants have noted that fiscal policy in recent years has also been more conservative at the central government level.
“The fiscal policy consolidation coincides with an orthodox monetary policy that has anchored inflation expectations,” an Amundi report published June 6 said.
“The main risk to monitor is the diversion towards unproductive expenditure vs capex remains a key risk factor.
"We expect the Reserve Bank of India to be on hold in the short term and with limited room for easing measures due to the growth inflation mix.”
The benchmark repo rate stands at 6.5% and was last raised in February 2023.
ELECTION SURPRISE
The recent elections were also considered crucial for foreign and local investment appetite, especially for stock markets.
India’s equity markets bounced between losses and gains in the immediate days after the results were announced as the election results stunned observers.
Still, beyond the short-term volatility, markets are expected to eventually refocus on fundamentals and corporate earnings, said Banerjee.
Strong growth conditions, well anchored inflation and a neutral to accommodative policy stance support a positive outlook on corporate India’s long-term earnings outlook, according to several research reports.
“If the new [Narendra] Modi government focuses on boosting consumer spending with subsidies in the agriculture sector and supporting income gains for the middle class, domestically focused small- and mid-cap stocks that have underperformed could see a significant catch-up," said Gary Dugan, CEO of The Global CIO Office in a note recently.
"This renewed focus on consumer spending and income growth could provide the necessary tailwind for active equity funds to regain their historical outperformance."
It remains to be seen what the new government plans are for economic growth. “Post swearing in of the new government, a full- fledged budget may get placed in June or July," said Banerjee.
“The direction of fiscal policy will be key to understand which way the economy is likely to be steered going forward and the sectors that will assume key importance going forward.”
Image credit: Shutterstock
BOND GAINS
India also joins the JP Morgan global bond index suite in June, which is expected to attract up to $30 billion of investment flows into government bonds.
“We believe the investors are already pre-positioning themselves before inclusion, so we don’t think there will be any significant impact on the yields as they have already softened factoring this event,” said Poonam Tandon, CIO of IndiaFirst Life Insurance.
“Having said that, with the inclusion, investors’ base will widen, and the bonds will likely become more liquid with lower risk perception and greater transparency in the other markets of the world. It will also open the possibility of inclusion in other major global indices, which is positive in the long run," she told AsianInvestor.
IndiaFirst Life Insurance Company, headquartered in Mumbai, is a joint venture between two large state-owned banks, Bank of Baroda and Union Bank of India, as well as Carmel Point Investments India, managed by private equity funds run by Warburg Pincus.
It had $2.7 billion in AUM at the end of March 2023.
The Amundi report also noted that India’s fixed Income space is attractive, with the highest nominal sovereign yields among Asian investment-grade countries.
“Furthermore, the volatility of the rupee is reducing and depreciation is more contained. The financialisation of savings has also led to huge inflows towards pension funds and insurance, collectively investing two-thirds of assets under management in fixed income.”
Shriram Life Insurance's Banerjee also previously emphasised high local and international appetite of Indian bonds.
Insurers invest a majority of their investments in fixed income, with the flexibility to invest about 2-3% in alternative investment funds.
EVOLVING RISKS
There are two evolving risks that investors need to keep a close eye on.
One is climate-related -- the El Nino effect -- a warming climate pattern.
“The El Nino impact (likely to stay till June 2024) has the potential to affect the monsoon pattern and thereby cultivation of essential crops. This will have a direct bearing on our rural economy which is still under recovery phase,” said Banerjee.
“The monsoon significantly affects various aspects of India's economy like inflation, rural income, consumer demand, trade, and farming productivity.”
Latest reports show El Nino may be switching to La Nina, which spells good news for India’s agriculture sector.
India’s Meteorological Department recently forecast an above-normal monsoon this year, raising hopes that crop output will boost economic growth.
The US weather agency also recently confirmed that weather conditions will transition to La Nina in about two months in the Pacific Ocean, which is expected to help the monsoon season in India.
Geopolitical developments – new and on-going – also have the potential to disrupt investments in Indian assets and more broadly, global financial markets.
“These [geopolitical issues] have significant bearing on the country’s economy and supply chain systems globally,” added Banerjee.