Trade deals set to boost Indian equities say analysts

A fragile ceasefire with Pakistan and trade deal with the UK has left analysts hopeful for a stock market surge in India, as the government seeks to take a bite of China’s electronic manufacturing industry.

On Monday following the peace deal, India’s ‘Nifty 50’ blue chip stocks recorded their best day in four years, and are less than five per cent off their all time high.

India and Pakistan managed to agree on a ceasefire after skirmishes turned into a full-blown war, with both sides claiming the end of fighting as a victory.

“The markets, had that not happened, would have collapsed,” Gaurav Narain, Principal Adviser of the India Capital Growth Fund, told City AM.

Instead, markets have responded positively, boosted by developments in the ongoing global trade war.

Trade deals

While the US has yet to agree to a trade deal with India, the country’s recent agreement with the UK has fueled stocks’ surge.

Analysts agreed that India will likely be the biggest beneficiary of the deal with the UK, thanks to concessions on issues such as national insurance.

“To the extent that India did better in these negotiations, it reflects the strong position that India finds itself in within the new global arena,” said Ian Smith, portfolio manager at William Blair Investment Management.

While Indian stocks did dip slightly after US president Donald Trump’s ‘Liberation Day’, the country was relatively unaffected, as high-ticket India exports like IT services and pharma weren’t covered by the blanket tariffs.

“India is primarily a domestic-driven economy so near-term negative sentiment on the trade-front should be mitigated as the domestic macro picture improves – the government and the central bank are taking steps to address the recent weakness in the Indian economy, whilst the corporate sector remains relatively healthy,” said Williams.

Meanwhile, the US and India have already announced a plan to ramp up their trade to $500bn by 2030, compared to current trade levels of $129.2bn.

Negotiations for a trade agreement with the US are ongoing, with US officials hinting India is among the highest priority nations for a deal, and the UK deal could help India’s position during these talks.

Analysts are expecting the first frameworks of a deal to be announced within the next month, given that Indian prime minister Modi was one of the first world leaders to begin pushing the issue with Trump.

“It is not a done deal though – there will be sticking points, for example in relation to tariffs on agricultural products or to foreign direct investment in India’s retail sector,” noted Smith.

A trade deal with the European Union is also expected by the end of the year, Narain said.

Indian attractions

In addition, US foreign direct investment in the country is ramping up, with Apple announcing last week that it intended to shift the rest of the assembly for US-sold iPhones to India as soon as next year.

“This will accelerate the Indian growth trajectory,” said Anand Gupta, lead Indian portfolio manager at Allianz Global Investors.

India only accounts for two per cent of all global electronics manufacturing, compared to 63 per cent for China, leaving significant room for the country to expand.

The plan has significant political backing too, with Indian government pledging to protect IP and aiming to nearly double the manufacturing sector share of GDP from 12 per cent to 23 per cent over the next decade.

As relations between the US and East Asia continue to sour over trade, Williams said the perception was that “the US will value the importance of India as an Indo-Pacific ally,” which could also help it attract further investment.

“The more Trump hits China, the better it is for India, is the general view in India,” added Narain.

US sanctions on India are also unlikely, and with the political situation in the country somewhat stable, foreign investors are likely to view it as less risky, he added.

Ultimately, analysts remain confident in the country’s performance, especially as the first reports of corporate earnings show a return to growth, which have averaged 13 per cent in recent years.

“Indians are credit shy: At a individual level, at a corporate level, at a government level, it has the lowest debt versus all emerging markets,” noted Gupta, leaving it appealing for international investors.

Indian capital markets are also rapidly expanding, with more than double the number of stocks with a market capitalisation of $5bn compared to the UK.

“India has some of the same ingredients for progress that China had in the early 1990s, when you consider demographics, purchasing power parity conversion rates, or the low economic base,” concluded Smith.

“We find it hard to find another major nation in the world that comes close to India in terms of the potential to garner a growing share of global trade and capital flows, or indeed of global economic activity.”