At the pace suggested by Ritu Arora, CEO and chief investment officer (CIO) Asia at Allianz Investment Managers, India may well surpass the government’s target of $5 trillion GDP by 2025 with a marginal delay. For perspective, it took India seven years to add $1 trillion to become a $2 trillion economy in 2014, World Bank data showed.
“As part of the ongoing multi-decadal growth super-cycle, India is expected to add a trillion dollar to nominal GDP every few years. This is a trend no investor wants to lose out on,” Arora told ETMarkets.com over an e-mail interview.
The COVID-19 pandemic is expected to extract a heavy toll as the economy is likely to shrink nearly 8 per cent this financial year, a first in nearly 40 years.
Arora looks after the Asia Pacific portfolio of global insurance behemoth Allianz SE from Singapore and manages assets of around $40 billion.
Most promising demographics, high quality corporates, deep and efficient financial markets, strong democratic institutions, an improving policy paradigm and GDP per capita that is at the cusp of breaking upwards are some of the factors that Arora believes is attracting foreign investors to the country’s shore again.
In 2020, Indian capital markets saw inflows worth over $20 billion, the only emerging market besides China to see positive inflows in the calendar year despite a raging COVID-19 pandemic and a first technical recession in the country’s independent history in first half of 2020-21.
The insurance industry veteran is also sanguine about the prospects of India’s pharmaceutical and specialty chemicals industry, which she believes are in various phases of becoming structural growth stories.
“These would be greatly helped by targeted tax incentives, export promotion measures, cluster-based infrastructural support and protection from unfair practices like overseas dumping,” she said.
Following are the edited excerpts:
In 2020, India was the sole emerging market ex-China to receive foreign portfolio flows. What made Indian stock market stand out?
From a long-term investment perspective, there are a lot of factors that make India a uniquely attractive emerging market for foreign investors. Among others, some of these are: most promising demographics, high-quality corporates, deep and efficient financial markets, strong democratic institutions, an improving policy paradigm and GDP per capita that is at the cusp of breaking upwards. As long as this structural story remains intact, any drawdown is an opportunity for long term investors. As part of the ongoing multi-decadal growth super-cycle, India is expected to add a trillion dollars to nominal GDP every few years. This is a trend no investor wants to lose out on.
The inflows of the previous year were further helped by the response of global central banks to the pandemic. Steep cuts in US interest rates and a weak dollar caused investors to look for quality opportunities globally. With successful vaccines and expectations of a new and decisive US administration, investors are hoping for a sustained recovery in the second half of 2021 and beyond.
While 2020 was a year of pain and resilience, 2021 is being seen as the year of hope. What according to you will investors be most concerned about as we crawl out of the shadow of the pandemic?
For 2021, two main concerns are ‘the journey from vaccine to vaccination’ and, avoidance of a repeat of ‘taper tantrum’.
On the former: this is the most comprehensive vaccination program ever. It will come with its successes and struggle. For now, markets are factoring in an accelerated rollout with a return to a semblance of normalcy by the second half of 2021. There is a lot of hard work and patience required to get there.
On the latter: The anticipation of a stimulus is causing a rise in inflation expectations. Commodity prices are also recovering. US yield curves are steepening, and especially the long end is rising. If interest rates move up too fast too soon, investors might panic. Formalization and communication of a Federal Reserve-led yield curve control could help assuage this.
Therefore, we expect volatility to continue through 2021 and a full recovery only by 2022.
You have previously stated that the pandemic will only delay not derail India’s ambition of becoming a $5 trillion economy. Do you expect the government to do another policy reset in Budget 2021 to achieve that goal?
Indeed, Covid-19 has caused a momentary setback but the march to $5 trillion economy and beyond continues. Looking at how India’s annual budgets have evolved, it is a crucial annual signaling event. The actual impact on the economy and markets is determined by the implementation. There is palpable investor optimism that Indian markets will be opened more and integrated ever more closely with world markets.
Wide-ranging long-term reforms like IBC, RERA, GST, ease of doing business etc. are under implementation, and follow through on them is most essential. The quality of government spending will be watched most closely.
Insurance is a space that is very close to your heart. What policy actions you expect the government to take to further improve the growth prospects of the sector?
India has a very capable and vibrant insurance sector, but it needs all the policy help that it can get from the government to plug the second largest insurance gap of $27 billion in the world. In spite of decades of endeavor, insurance penetration is only around 3.7%. There are many low-hanging fruits that can transform this situation into a win-win for policyholders, the sector and the Indian economy. First and foremost, relaxing the onerous 18% GST on insurance premiums will help policyholders protect themselves and their families with limited cost impact.
Another key measure would be opening up the sector further to FDI. While FDI is needed at all points of time, India needs it now more than ever. The inflows will provide resources to the government to support economically critical sectors like infrastructure. Simplification and clarification of M&A rules will also improve investment flows. Additionally, increased income tax benefits especially for protection will improve penetration and directly benefit policyholders.
Technology comes across as a major theme in most of the Asia-dedicated funds of Allianz and while the current low interest regime is supportive for valuations, do you believe that there is a need for some temperance of optimism?
Technology has been a top-performing sector in 2020 and it remains a long-term theme well beyond 2021. Valuations are selectively becoming quite exuberant and therefore investors should carefully evaluate their positions in the sector. Also, as the economic recovery becomes more broad-based the reflationary trade positioning for a more normal world will only gather momentum. Therefore, it is worth evaluating reallocation to quality names in sectors like financials, energy, auto and metals, which are now poised for a significant catch-up.
There has been a lot of optimism in sectors such as specialty chemicals and pharmaceuticals, given the buzz around “China + 1” theme. Are these sectors attractive to you as structural growth stories?
Thanks to India’s highly skilled workforce, it stands out as a hub of knowledge-driven high-end manufacturing. The ongoing global diversification of supply chains is therefore indeed a big opportunity to spur growth and provide high-quality employment. Pharmaceuticals, specialty chemicals, and electronics manufacturing are in various phases of becoming structural growth stories. These would be greatly helped by targeted tax incentives, export promotion measures, cluster-based infrastructural support, and protection from unfair practices like overseas dumping.
Your exposure to the Indian market across public and private markets is around $4 billion. What are some of the areas of the Indian economy you see as opportunities to increase your footprint and what kind of capital commitment can we expect from Allianz going ahead?
India is one of our key investment markets. We have made significant commitments in the Indian infrastructure such as roads, commercial real estate, private equity, and private credit. We are at all times actively looking at various investment opportunities across the spectrum and believe India presents a strong structural growth story that will continue to attract greater allocations from our global balance sheets.