EM equities: when 5% growth feels like a recession

6 members of our emerging market equities team was on the ground in India recently to understand the slowdown in India.

10 Oct 2019

Key highlights :

  • Slowdown in India caused by a number of factors, most recently liquidity issues in the financial system
  • Long-term structural changes ongoing, government recently implemented more immediate measures
  • Good quality franchises are more easily able to differentiate themselves from the pack in this environment
  • Roughly neutral exposure to India in our global emerging markets / Asia equities portfolios
  • Key exposure being high quality private sector banks which should be able to further pull ahead of their peers when the tide is low
  • No urgency to add to our India exposure at the moment, we expect to better buying opportunities in the near future.

Is 5% growth a recession?

Rest easy…….we aren’t talking about China…which hasn’t hit 5% yet. We are talking about the land of diversity, the other country with over a billion people…India.

India printed 5% GDP growth in Q2 this year and spooked markets and investors who were expecting much more. As our esteemed colleague who covers ex-Asian Emerging Markets put it however:

You don’t know what a recession is till you you’ve seen a negative 2% GDP growth!

referring to the likes of Brazil and Russia in difficult times.

Nevertheless, the mood on the ground was sombre at best.

Subscribe now

Perspectives matter. Tune in to our insights.

Street view: Sale of two-wheelers in the slow lane

This was best exemplified in a meeting we had with a two-wheeler manufacturer in Delhi, whose capacity utilisation was down from above 100% to 65%.

Monthly sales had declined from ~ 70‘000 units to less than 55‘000, and inventory had increased over the same period. time.

In its segment, the manufacturer has a 90% market share, so its woes seemed representative of the situation on the ground.

But we are getting ahead of ourselves. Let’s start at the beginning.

Six of us started our trip in Mumbai, meeting mainly CEOs and senior management of financial institutions. This trip was designed differently from our previous ones and had a more macro focus given the concerns over the slowdown. The reasons for the slowdown seemed fairly clear: it was a confluence of a number of issues which had come to roost this year.

What’s causing slower growth in India?

  • The implementation of the Goods and Services tax in 2017, while most likely a long-term positive, negatively impacted small and medium business who had to scramble to comply.
  • A consumer lending boom over the last few years was also taking a breather from its hectic pace, partly impacted by liquidity issues in the financial system
  • Bad loans made by the public sector banks in past years, resulting in high NPLs and (overly) cautious lending practices now
  • The supreme court’s diktat to implement tighter emission standards (BS4 to BS6) for the auto industry as of 1st April 2020 caused a slowdown in auto sales – after all, why buy a BS4 vehicle now when one has to adhere to BS6 in 6 months?
  • While the 2019 union budget announced in 2019 struck a reformist chord and maintained fiscal discipline, it was perceived as being market unfriendly by increasing taxes on the highest earners and foreign portfolio investors, and introducing taxes on share buybacks
  • A liquidity freeze in the non-banking financial corporations (NBFCs), sparked by a leading infrastructure financing firm defaulting on its obligations last year, had choked the flow of credit through the system

On the last point, what we heard time and again on the ground was “there is ample liquidity, but little confidence and trust”. This was referring to the fact that the NBFCs no longer had unfettered access to the wholesale funding markets because banks didn’t know which NBFCs had sound balance sheets and which didn’t.

And hence our conclusion that till such confidence returns, not only is a strong recovery invisible, but the chances of a mini-crisis or flare up in the financial system remains.

From Mumbai to Delhi

We then moved to Delhi where we attended a macro conference with senior government and corporate representatives in attendance. The government representatives emphasized the need to look beyond the short–term and focus on the longer term structural changes taking place.

After all India had jumped from 130th in 2016 to 77th in 2018 in the World Bank’s Ease of Business rankings. They reiterated the emphasis on:

  • Maintaining fiscal discipline and keeping inflation under control
  • Further improving the ease of doing business
  • Public sector divestments and asset sales
  • Opening up the FDI regime
  • Driving digitization

India is now one of the highest users of data

On the last point, there is certainly somewhat of a digital revolution taking place in India. Within the span of 4 years , India has gone from being one of the lowest consumers of data to one of the highest in the world, on a per capita basis!

This has been catalysed by the India conglomerate Reliance launching dirt cheap data plans a few years ago – which has led people across the country, from rural to urban, from toddlers to grandmoms, to fall in love with their smartphones.

This has also spurred a multitude of tech startups across the sepctrum, from agriculture to fashion designing. One interesting factoid we heard was that over half of the graduates of the prestigious engineering institute, IIT (Mumbai) , were either joining startups or starting up on their own. While there aren’t many listed companies in this space yet, the picture could be very different in a few years.

India has rolled out plans to boost investor confidence

Perhaps mindful of John Maynard Keynes’ quote: “In the long run we are all …” , over the past few weeks the Indian government announced more immediate plans to revive growth and boost investor confidence. These recent measures include recapitalization and merger of public sector banks (PSU), rolling back of higher taxation on capital gains for foreign investors and cuts in corporate tax rates.

That is not to ignore the many significant challenges that still abound in the country, including:

  • Developing the manufacturing sector and penetrate global markets – and be able to catch some of the shifts in supply chains due to the trade conflict
  • Job creation
  • Gender parity in workforce: less than a third of women work
  • Agricultural reforms: over half of the Indian workforce is still employed in Agriculture
  • Labour and land reforms

These challenges and the current issues do however create an environment where well managed and good quality franchises can more easily differentiate themselves from the pack, providing investment opportunities for long-term investors.

While we have a roughly neutral exposure to India in our global emerging market portfolios, a key element of this exposure is high quality private sector banks which should be able to further pull ahead of their peers when the tide is low. We are in no hurry to add to our India exposure at the moment and we expect to have better buying opportunities in the near future.

We are in no hurry to add to our India exposure at the moment and we expect to have better buying opportunities in the near future.

Two steps forward and one step back

While we certainly can’t say that the worst is over, and the risk of a flare-up or mini-crisis in the financial system remains, the case for India continues to be what some of us in the team have believed for long: two steps forward and one step backward.

And in this world of low growth, that’s not a bad thing.

Boots on the ground

Members of UBS Asset Management’s EM Equity team during a property site visit in Gurugram, India, in September 2019. 

From left:

  • Projit Chatterjee, Senior Equity Specialist
  • Kelvin Teo, Analyst, Financials
  • Geoffrey Wong, Head of Emerging Markets and Asia Pacific Equities
  • Urs Antonioli, Head of EM EMEA and Latin America Equities
  • Manish Modi, Portfolio Manager, Asia ex Japan
  • Princy Singh, Analyst, Consumer / IT services

Street View: travel notes from our emerging markets research team

On the ground research trips are important to our investment process.

Visiting factories, walking around the shop space, talking to management and customers allow the team to test if the assumptions in our valuation models are likely to be achieved.

More insights

Singapore Retail Investors


This website is not intended for and should not be accessed by persons located or resident in any jurisdiction where (by reason of that person's nationality, domicile, residence or otherwise) the publication or availability of this website is prohibited or contrary to local law or regulation or would subject any UBS entity to any registration or licensing requirements in such jurisdictions. It is your responsibility to be aware of, to obtain all relevant regulatory approvals, licenses, verifications and/or registrations under, and to observe all applicable laws and regulations of any relevant jurisdiction in connection with your entrance to this website. Each investment product and service referred to on this website is intended to be made available only to residents in Singapore.

UBS reserves the right to change, modify, add or remove content on the website as well as these terms at any time for any reason without notice. Such changes shall be effective immediately upon posting. You acknowledge that by accessing our website after we have posted changes to these terms, you are agreeing to these terms as modified.

The materials on this Website are distributed by UBS Asset Management (Singapore) Ltd (company registration number: 199308367C), which is licensed by Monetary Authority of Singapore ("MAS") in Singapore pursuant to the Securities and Futures Act (Chapter 289 of Singapore). UBS Asset Management (Singapore) Ltd is part of the Asset Management business division of UBS Group AG. UBS Asset Management (Singapore) Ltd together with UBS Group AG and its group companies shall collectively be referred to as "UBS".

The information contained in this Website has been prepared and is intended for general circulation. The information does not constitute advice and does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. The investment services or products referred to in this Website may not be suitable for all investors. UBS recommends that you independently evaluate particular investments and strategies and seek independent advice from a financial adviser regarding the suitability of such investment products, taking into account your specific investment objectives, financial situation and particular needs, before making a commitment to purchase any investment products. Investment involves risks. You should be aware that investments may increase or decrease in value and that past performance is not indicative of future performance.

The information contained in this Website is not an offer to buy or sell or the solicitation of an offer to buy or sell any investment product or to participate in any particular trading strategy. UBS, its officers and/or employees may have interests in any of the investment products referred to on this Website by acting in various roles. UBS, its officers and/or employees may receive fees, commissions or other benefits for acting in those capacities. In addition, UBS, its officers and/or employees may buy or sell investment products as principal or agent and may effect transactions which are not consistent with the information set out in this Website.

You fully understand and agree that, by making available this Website, UBS should not be construed as making: (a) any endorsement of any investment product referred to in this Website; (b) any representation that UBS has performed any due diligence on any investment product referred to in this Website; or (c) any representation that the information in this Website is complete, accurate, clear, fair and not misleading. The use or reliance on any such information contained in this Website is at your own risk and any losses which may be suffered as a result of you entering into any investment are for your account and UBS shall not be liable for any losses arising from or incurred by you in connection therewith. UBS is not responsible or liable for the accuracy and completeness of any such information or the performance or outcome of any investment made by you after receipt of such information, irrespective of whether such information was provided at your request.

Using, copying, redistributing or republishing any part of this Website without prior written permission from UBS is prohibited. Any statements made regarding investment performance objectives, risk and/or return targets shall not constitute a representation or warranty that such objectives or expectations will be achieved or risks are fully disclosed. The information and opinions contained in this Website is based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any misrepresentation, errors or omissions. All such information and opinions are subject to change without notice. A number of comments in this Website are based on current expectations and are considered “forward-looking statements”. Actual future results may prove to be different from expectations and any unforeseen risk or event may arise in the future. The opinions expressed are a reflection of UBS’s judgment at the time this document is compiled and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed.

UBS does not hold out any of its officers and/or employees as having any authority to advise you, and UBS does not purport to advise you on any investment product. Any investment will be made at your sole risk and UBS is not and shall not, in any manner, be liable or responsible for the consequences of any investment.

This Website and its contents are provided on an “as is” and “as available” basis. UBS does not warrant: (a) the accuracy, timeliness, adequacy commercial value or completeness of this Website or its contents, and expressly disclaims any liability for errors, delays or omissions in the contents, or for any action taken in reliance on the contents; (b) that your use of and/or access to this Website or its contents, will be uninterrupted, timely, secure or free from errors or that any identified defect will be corrected; (c) that this Website or any content will meet your requirements or are free from any virus or other malicious, destructive or corrupting code, agent, program or macros; (d) that any information, instructions or communications posted or transmitted by you through this Website is secure and cannot be accessed by unauthorised third parties; and (e) that use of the contents in this Website by you will not infringe the rights of any third parties. No warranty of any kind, implied, express or statutory, including but not limited to the warranties of non-infringement of third party rights, title, merchantability, satisfactory quality or fitness for a particular purpose and freedom from computer virus or other malicious, destructive or corrupting code, agent, program or macros, is given in conjunction with this Website.

You hereby agree to indemnify UBS and any of its officers, employees or agents against, and to keep UBS and any of its officers, employees or agents harmless from, any claims (actual and threatened), settlement sums, liability, loss, damages, costs (including solicitor and client costs and expenses (legal or otherwise)), charges, expenses, actions, proceedings, whether foreseeable or not which we may sustain, suffer or incur, directly or indirectly out of or in the course of or in connection with any the following: (a) any use of this Website or the contents by you, or any part thereof; (b) UBS having made available the Website; (c) any breach of these Terms by you, however arising; or (d) any negligence, act or omission, wilful default, unlawful act, fraud and/or misconduct on your part or violation of any rights of another person or entity by you.

The funds referred to in this Website have been authorised or recognised by the MAS for sale to the public in Singapore (the “Funds”). Copies of the registered Singapore prospectuses ("Prospectuses") referred to in this Website have been lodged with and registered by the MAS. The MAS assumes no responsibility for the contents of the Prospectuses. The registration of the Prospectuses by the MAS does not imply that the SFA or any other legal or regulatory requirements have been complied with.

MAS registration is not a recommendation or endorsement of a Fund nor does it guarantee the commercial merits or performance of such Fund. It does not mean that a Fund is suitable for all investors nor is it an endorsement of its suitability for any particular investor or class of investors. UBS Asset Management (Singapore) Ltd has been appointed as the representative for the Funds in Singapore for the purposes of performing administrative and other related functions relating to the offer of Shares under Section 287 of the Securities and Futures Act, Chapter 289 of Singapore (the "SFA") and such other functions as the MAS may prescribe.

You may not assign your rights under the Terms without our prior written consent. UBS Asset Management (Singapore) Ltd may assign our rights under the Terms to any third party.

No person or entity who is not a party to the Terms shall have any right under the Contracts (Rights of Third Parties) Act, Chapter 53B of Singapore or other similar laws to enforce any term of the Terms regardless of whether such person or entity has been identified by name, as a member of a class or as answering a particular description. For the avoidance of doubt, this shall not affect the rights of any permitted assignee or transferee of the Terms.

These Terms shall be governed by, and shall be construed in accordance with, the laws of Singapore. The courts of Singapore shall have exclusive jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with these Terms and, for such purposes, you agree to submit  to the jurisdiction of the courts of Singapore. Each party hereby waives any objection which it might at any time have to the courts of Singapore being nominated as the forum to hear and determine any proceedings and to settle any disputes and agrees not to claim that the courts of Singapore are not a convenient or appropriate forum.

© UBS 2020 - the key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.