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For the first time in a decade, and as widely expected, the US Federal Reserve hiked the key interest rates by 0.25% last month. The economic powerhouse that the US is and the intertwined nature of the financial markets mean that the rate hike will have rippling effects on many other key economies.
Focusing on the Indian markets, we have contradictory views. Certain analysts and senior government functionaries have stated that India is well cushioned. Following the rate hike, Indian markets had traded up in the very next trading session.
However, the concerns cannot be ruled out completely. A rate hike, followed by a strengthening US dollar, may also lead to dismal foreign sentiment. The path that the foreign institutional investors choose is crucial. Among other concerns, the unfavorable external debt profile of India is also a worry. On top of that, Indian markets are suffering now, just as the Chinese markets and US benchmarks. The plunge in commodities and the yuan devaluation are major concerns as well.
Amid concerns and counter arguments that the Indian markets have already factored in the rate hike impacts, we advise investors to be cautiously bullish about the region. The Indian stock markets ended higher after the news of the Fed’s rate hike came in. For investors interested in the region, we will highlight three stocks.
Perhaps, the reaction of foreign institutional investors (FIIs) is a key factor. The markets will obviously dislike if FIIs continue their withdrawals, as they have been doing of late. Since November, they have pulled out billions from the Indian markets. Capital moving from the emerging markets to the developed markets is a natural phenomenon as investors are lured by higher rates.
However, many opine that this factor is priced in. Experts are of the view that the news, or the anticipation, of a rate hike is more important than the actual rate hike. This was the case with the news of quantitative easing tapering rather than the actual event.
While the US now has higher rates to attract investors, the currency valuation is also a concern. Analysts predict the Indian rupee may slump to below 70 per dollar. Here again, it needs to be seen if the dollar is coming in or flowing out of India.
On Jan 14, the Indian rupee had dropped to the lowest level since Sep 2013 against the dollar. The Reserve Bank of India was compelled to sell dollars via the state-owned banks to trim the decline. As of latest data available, Indian rupee was at 67.1250 against the US dollar.
Lower rupee will make the imports more expensive. Weaker rupee and stronger dollar may also erode the positives that India may enjoy from low crude prices. India imports over 75% of its oil demands.
While weaker currency boosts exports, India may not benefit significantly on this front. The slowdown in the European Union, which happens to be one of India’s biggest export markets, is a big headwind. In November, merchandise export slumped 24%, the twelfth straight month of a decline. India is also in a stiff competition with China, which devalued the yuan to the lowest level in about three years.
Weaker rupee would also lead to increased inflation, an evil India is already fighting against. In November, retail inflation had shot up to a 14-month high. If cost of imported raw materials shoots up, the companies will hike prices and translate the extra burden on consumers.
India Ready to Tackle Concerns
Key Indian government dignitaries had opined that India is ready to tackle the woes. In fact, some say that the negatives are already priced into the stock markets. They stated that India is insulated to the risks that Fed’s rate hike creates.
Chief economic adviser Arvind Subramanian had mentioned that India is “well cushioned” and the impact on India will be “very minimal.” The rate hike was anticipated for a long time, and thus the markets have already priced in.
Sounding optimistic, Subramaniam also said: “As far as India is concerned, we are really well cushioned. Inflation is coming down, fiscal deficit situation is very good, external situation is also robust. So, I think for all these reasons, impact on India would be very minimal.” However, he did say that the impact will actually depend on the future rate hikes.
Reserve Bank of India (RBI) Governor Raghuram Rajan had also allayed fears as he mentioned that the central bank is ready to tackle any impact. Meanwhile, India’s Economic Affairs Secretary Shaktikanta Das said voiced similar optimism as he said that the rate hike was on expected lines and India is well prepared for it.
Meanwhile, India is in the most favorable position among the 27 emerging markets, as per Morgan Stanley MS. They have maintained an “overweight” position on India and the country has the “best” score among other emerging markets in terms of macroeconomic risk.
Moody’s shared positive view on India’s sovereign rating and mentions that “India’s growth inflation and external balances have improved.” However, Moody’s does note that the weak external situation will hamper India’s growth. There is just a change in outlook, as India is now rated Baa3 positive instead of the 2015’s Baa3 stable. The rating has not changed. Union Finance Minister Arun Jaitley once again provided assurance recently; he claimed India is on growth path despite the global economic uncertainty and volatility.
Indian Stocks in Focus
In the immediate trading session after the Fed’s rate hike announcement, Indian markets had ended significantly higher. The 30-share BSE Sensex index ended nearly 310 points higher, while 50-share NSE Nifty gained 93.45 points.
However, much like the key global indices, including that of the U.S., the Indian benchmarks have been on a losing streak. Indian markets had the worst start to a year in five years. India’s 50-share NSE Nifty is had dropped briefly below the psychological 7500 mark and was at an 18-month closing low. The S&P BSE SENSEX meanwhile is down over 5% year to date. In fact, Sensex is down over 17% from its 52-week high. A correction of 20% will commence the ‘bear market’ phase.
With such massive declines, views that the markets had actually priced in the Fed’s rate hike could not be proved completely. Arun Jaitley had commented that Indian markets must reconcile to the new situation now.
The plunge does make situation very jittery. However, if markets move up, certain Indian stocks may be bargain picks. They come at a discount now, and investors may keep the following ADRs on their radar. They carry a Zacks Rank #3 (Hold) at the moment, but may move up if Indian markets start moving up now since the suspense is over.
MakeMyTrip Limited MMYT is an online travel service company which offers travel products and solutions in India and the United States. Recently, MakeMyTrip’s shares were boosted after Ctrip.com International Ltd. CTRP agreed to invest $180 million via convertible bonds in MakeMyTrip. This will help MakeMyTrip grow and stave off competition.
While benchmarks had the worst start to a year ever in 2015, MakeMyTrip is currently up over 22% year to date. MakeMyTrip is showing encouraging momentum trend, as its 4-week price change of 17.3% is in stark contrast to industry’s average loss of 9.6%. Over the 12-week period also, its 23.6% return outperforms industry’s loss of 5.2%.
Tata Motors Ltd. TTM develops, manufactures, assembles and sells passenger and commercial vehicles worldwide. Both Growth and Value Score for Tata Motors is ‘A’. Its forward price to earnings ratio (P/E) of 7.93 compares favorably with industry average of 8.57. Also, the Price/Sales ratio of 0.42 is lower than industry average of 0.48.
Though Tata Motors had ended in the red in 2015, this auto manufacturer has shown a steady rebound since Sep 29 and has gained 20% since then. The automaker reported in October that its global wholesales, inclusive of the Jaguar Land Rover, increased 21% year over year to 97,102 vehicles in Sep 2015.
WNS (Holdings) Ltd. WNS is a recognized leader in business process outsourcing. They deliver value to their clients by bringing operational excellence and deep industry and functional knowledge to their critical business processes.
WNS is seeing favorable growth trends compared to industry average. The current cash flow growth of 17.68% also outperforms industry average of negative 2.91%. WNS carries a P/E of 17.33 and PEG ratio of 1.11, better than industry average of 17.40 and 1.33, respectively. In 2015, WNS had an astounding gain of 47.3%.
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