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Back in April, I’d discussed why India remains the most attractive developing market in 2018. This will likely continue into the next decade. On July 19, the Asian Development Bank reiterated its forecast for India’s economic growth in FY 2019 and FY 2020. It projected that India will post 7.3% growth in 2018-2019 and 7.6% growth in 2019-2020.
According to the Asian Development Outlook, this growth will be powered by higher private investment, increased public spending, and a higher capacity utilization rate. The disruption caused by the Modi’s policy of demonetization has dissipated, and private consumption is expected to grow to a healthy rate into the next decade.
India has managed to outpace China’s growth in the latter half of this decade due to a number of factors. After the 2015-2016 credit crisis in China, the nation committed to modernizing aspects of its financial system, which has led to added restrictions and tightening.
China is also threatened by the deepening trade war with the United States, which has accelerated dangerously in recent months. India has emerged as a strong ally to the United States and has managed to avoid falling into the cross-hairs of the Trump administration thus far. However, this may not last. The United States is preparing to submit a “problem list” to India, which could be a prelude to similar trade disputes.
The trade war has dealt major damage to emerging markets since the spring. This is unfortunate considering their solid performance in the beginning of the year compared to stock markets in the developed world. iShares China ETF, for example, has fallen 4.22% in 2018 as of close on July 19. Compare this to a 27% jump in 2017.
In spite of this, I still like Fairfax India Holdings Corp. (TSX:FIH.U) for the exposure it offers to Indian markets. Shares are up 11.1% in 2018 so far. The holding company is set to release its second-quarter results in early August.
In the first quarter, Fairfax India Holdings announced net earnings of $28.8 million, or $0.19 diluted net earnings per share, compared to $149 million in net earnings in Q1 2017. This drop was due to a drop in net unrealized gain on investments.
India’s growth is an exciting story, but investors should still be aware of the risks involved in the developing global trade war. We should receive some clarity on several fronts before 2018 is concluded, and India will likely be impacted by the international ramifications of decisions that are yet to be made. Two major developments are of note right now: whether or not the Trump administration will move forward on auto tariffs and the fate of its threat to impose $200 billion in tariffs on Chinese goods. The latter proposal will be reviewed in August.
For the time being, India is a great target as it has become a magnet for international investment, and its internal economic situation has improved greatly. Investors should watch the Q2 results for Fairfax India Holdings closely.
