Hello, and welcome to the Morningstar series,"Market Reaction.
" I'm Emma Wall and I'm joined today by Medha Samant, Investment Directorfor Fidelity.
So, we're here today to talk about India.
Now, a couple of years ago India after having 30 years of amalgamative governments electeda single party to power and became the darling of investors because of this.
However, afterthat it suffered losses in the stock market as it, sort of, came off the boil.
Where arewe at now? Well, that's a very interesting question,Emma.
India has been a key overweight in our portfolios, in Fidelity's regional portfolios,despite the markets having underperformed in the recent past and there are a numberof reasons for that.
The first is that we strongly believe that India's macro story,when it comes to its top-line GDP growth, is well intact, especially if you look atthe low-growth environment that we're in today.
The other reasons are that reforms are wellon their way ahead.
Corporate earnings seem to have bottomed out and we are really atan inflection point when we look at companies' balance sheets and ROEs where we see a cyclicalupturn or a turnaround in margins and that's making us very, very positive right now.
And one of things that people really like about India other than the fact that now ithas surpassed China as the biggest growing economy or fastest-growing economy, I shouldsay, in the world, is the demographic story.
People would talk about demographics as eitherbeing a positive or a negative for an economy.
In Japan, it's negative because we've gotseverely aging population there and low birth rate and indeed, no immigration, whereas Indiahas this incredibly young, vibrant, educated population.
How do you turn that fact, thatstatistic, into returns for investors though? Yes, exactly.
So, India has the youngest populationtoday when you look at the working age level people that's going to enter the workforceover the next 20 years or so and that's the biggest long-term story which is intact.
So,it's really this attractive demographic profile which is supporting India's structural long-termgrowth drivers and this we expect will benefit consumption.
And therefore, when you look at our portfolios, we're most positive on consumer names, especially.
For example, the auto names or the car sector where it's still very, very underpenetrated.
So there is a real demand, we think, over the long-term from this very young populationfor underpenetrated consumer goods and services and that's making its way into our portfolios.
And why then do we have this period of underperformance, looking forward are you feeling more positive?What has changed? Or is it just the fact that we needed to take a little while for the government'spolicies to take hold? Well, again, a few reasons for that.
One isthat India has been the consensus overweight trade.
Everybody loves India and feels thatthere is a long-term story here.
When you look at market valuations, they did run aheadof themselves.
So, today valuations are a tad above historical averages.
But if youlook at near-term or short-term catalysts for this market, with a good monsoon we thinka rural sector recovery could be the next sort of catalyst for this market to outperform.
And at the same time, when it comes to reforms, no real big bang reforms, but we've seen smallchanges happening on the ground, speeding up investment approvals, easing doing business,and that's making investors still very positive and that's why people – we haven't thatbroad sell-out.
Of course, when you look at the risks or theconcerns that we have, one is inflation.
India is running above-average inflation and anunexpected hike in food prices would mean that the RBI puts its monetary policy easingon hold.
So that's one factor that we need to watch out for.
And the second is aboutthe economic recovery for it to continue because although the government is spending, the privatesector cycle has still been pushed ahead.
Medha, thank you very much.
This is Emma Wall for Morningstar.
Thank youfor watching.