A NEW WORLD DISORDER

The Indian stock market has had a relatively tough year so far with lots of headwinds and unexpected surprises.

India continues to show strong economic growth. GDP growth for the second quarter was 7,8 percent. The corporate earning cycle is improving from a slow period last year. We still find many companies that can deliver 15-20 percent earnings growth and double revenue over five years.

The Modi government is pushing the accelerator this year with a tax reform to lower income tax and a GST reform that will make consumer goods more affordable. The central bank has cut interest by a 100 bps already and injected liquidity in the economy. Subdued inflation opens for further cuts.

So why have FII investors been selling the market for a year now?

Well the easy answer is valuation. Indian equities looks expensive, even compared to its own history. Future gains in the market will have to be led by earnings growth not multiple expansion.

Geopolitics and erratic trade policy from the American administration is another reason for India’s underperformance.

Trump started the trade war with China in 2018. That was the start of dismantling globalization and 80 years of free trade. A few years later global companies started to relocate manufacturing from China to India, this trend was called ”China plus one”. As an example of this, all iPhones for the US market will now be manufactured by Foxconn in India.

As late as April this year Modi and Trump met on good terms in Washington. India has lowered import tarifs for American autos. Modi also made a deal to buy more defence equipment from the USA. But now the relations between USA and India seems frozen.

India was recently hit with 50 percent tariffs for export to the USA, as a punishment for India buying oil from Russia. China on the other hand was given another 90 days to negotiate a trade deal with Trump. China has got an important negotiating chip, rare earth metals. India’s export to the US is only 2-3 percent of GDP and important sectors like pharmaceuticals and IT service has been exempt from tariffs so far.

Despite previous disputes, Modi is now opening up to warmer relations with China. China recently celebrated its 80 year anniversary of victory over Japan, at the end of the second world war. Modi was one of the guests. India is now opening for more trade with China. India is dependant on raw material and components for several industries as well as access to rare earth metals.

Elon Musk wanted to assemble Tesla cars in India. It now seems more likely that India will give permission for Chinese automaker BYD, (Build your dream), to make electric vehicles in India.

The outcome of the Beijing summit, attended by Xi Jinping, Modi, Putin and many leaders from the global south, was that there will be a ”New world order”, that does not include America and Donald Trump. All Trump has achieved so far with his trade policy, is to unite the world against him.