South Asia’s Moment

On 3rd August the Upper House of the Indian Parliament in New Delhi passed the Goods and Services tax (GST) with a unanimous vote. We expect this will be implemented by the second quarter of 2017 with an expected 18% tax similar to Europe’s VAT. Like Europe in 1992, India is effectively enacting a single market amongst its 1.3 billion people and 29 states, and it will have a similar impact on commerce and trade, boosting GDP growth by 2%, and corporate earnings by up to 20% over the next 2 years. In addition, we expect the Indian Rupee to strengthen because of the inflow of foreign portfolio capital, and the fall in the current account deficit, thanks to cheaper oil from 4.5% to 1% of GDP, saving nearly US$50 billion per annum.

This is a historic change for India and also reflects the political success of Prime Minister Modi’s governing party. We expect Indian shares will be among the best performing among Emerging Markets in the next 2 to 5 years.

In Pakistan, the Karachi Stock Exchange is also up nearly 20% this year with a stable currency, improved growth, privatisation and nearly US$50 billion of infrastructure investment from China.

The economy in Bangladesh (population about 163 million), has added 40 million people in the last 20 years, with GDP growth of 6% continuing, and foreign exchange reserves of US$30 billion. Bangladesh is also benefitting from rapid growth in export earnings, thanks to its competitive labour structure in textiles, pharmaceuticals and other industries. In both these markets, we have found excellent companies with strong earnings growth, some selling on PE multiples under 10 times.

Sri Lanka has made rapid progress since the end of the Civil War 7 years ago. With strong growth in tourist arrivals especially from China, and inflow of foreign capital into infrastructure and hotels, Sri Lanka is also growing at nearly 6% annually.

In the light of the US political situation, we do not expect the Trans-Pacific Partnership now to become reality. It is still true to say that Vietnam has a privileged position as a key American ally, a young population of 90 million and growth of around 6%. The Vietnamese Stock Exchange is making rapid progress and opening up more to foreign investors. The currency is stable and we are confident of further consumer growth.

In our Indian Ocean Fund which will be launched in late September, we will expect to have 75% invested in India, mainly in mid cap growth stocks, and around 5% in each of Pakistan, Bangladesh, Sri Lanka and Vietnam. On an opportunistic basis, we will also look for opportunities in Mauritius, Myanmar and other Frontier markets.

In our view South Asia represents the greatest potential for investors, in terms of political stability, demographics, economic growth and reforms such as Indian GST, which will markedly improve returns on capital, as they remove bureaucracy, corruption and inefficiency.

Whatever the changes in the rest of the world; in the USA, Europe or China, this region is likely to have an autonomous growth momentum which will be rewarding for stock market investors.

Robert Lloyd George
8 August, 2016