1. India emerges above the emerging markets; How to profit from this
Summary
 Emerging Market Overview- Bullish on India and Mexico. Uncertain about China’s
direction. Concern over stalling growth rates in China.
 China’s lack in sustained growth in 2014-factors such as housing bubble, over
capacity and a slowdown in exports and import
 India’s Economic state- positive manufacturing, service industry data coupled with
macroeconomic stability keeps India in a good economic and financial state. Key
indicators such as PMI, current account levels, GDP growth show reasons for
optimism
 Recap of India’s recent budget- Tax cuts, infrastructure boosts and AIF’s are some
reforms to be made this year. The government has hence focused on giving the
economy the necessary push to take off.
 Growth Factors and Investment Catalyst – Factors like favourable demographics,
commodity cycles and Modi effect spur investor confidence in the long run
 Indian Stock Market Outlook- positive and may be over priced, but now may be a
good entry time. Sector and stock recommendation should be based on a top down
approach and few recommendations in the Banking and Construction industry give.
Introduction-
The purpose of this article is to analyse the current economic condition of the emerging
market countries (BRIC nations) and show why India is in the most promising situation. The
length at which India and China have dominated the Asian markets can be seen by the names
encapsulated by the images used to portray them. China, conned the dragon is a giant,
aggressive force while the Elephant describes India’s big, powerful but limbering ungainly
image. I will show reasons for the optimism surrounding the recent budget proposed by the
Indian Finance minister, thus explaining why India is a potential outperformer. Brief
exploration of the key investment and growth catalyst coupled with investment ideas should
allow an investor to profit from this boom. The question is, can India outpace the dragon? If
so how, why and what can you do to gain from this.
Emerging Market Overview
The outlook for the emerging market covers 25 countries, but for perspective we will only be
considering India and China. It is sufficient to know that performance in emerging markets
have been varied, hence the overused but underutilized tool Diversification comes into play
.The relevance of emerging market equities lies in the fact that investors need to adapt to
future lower interest rates and stalling growth. Tepid growth implies that valuation of stocks
will be on the lower side, making macroeconomic research on sectors or countries that will

2. outpace the rest very relevant. India Sensex was the best performer in 2014 as clearly seen in
our table graph below.
Figure 1 Table shows varied growth among different indexes in Emerging Markets`
“Lower interest rates, combined with the lower bond yields they have created, will allow stock
returns to be better than they might be otherwise. Lower fixed-income yields can provide a
partial offset, as equities will look more attractive on a relative asset return basis,"
Figure 2 World Economy Forecast
Our attention is first directed towards China where economic growth is stalling. It is expected
that growth will decelerate. Firstly, we are aware that there is minimal data available around
the Chinese New Year period which implies momentum has been shifting. Stalling growth can
be attributed to the falling PMI. PMI (Purchasing Manger’s Index) has often been used as an
indicator of economic health of countries that are have a major chunk of their GDP attributed
to manufacturing. This implies that China's production , new order, supplier deliveries,
inventories and employment levels have fallenin 2015 and is looking to head in that direction.

3. ‘The official Purchasing Managers' Index (PMI) inched up to 49.9 in February from January's
49.8, a whisker below the 50-point level that separates growth from contraction on a monthly
basis’.
Figure 3 China's GDPforecast
Slowly, it has become evident that China’s initialrisewhich was built mainly on manufacturing
export led activity is now one of its greatest liability in its growth potential. China’s growth
currently is at its weakest in 24 years. 2014 was the first time in a century that China has
missed its official growth target, falling just short of the official goal of 7.5%. In the last two
years, growth deceleration moderated significantly, largely thanks to a variety of stimulus
measures. The People’s Bank of China cut interest rates and bank reserve requirements to
make more credit available, and financial deleveraging—reducing the growth of debt—has
been put on hold. Without such policy support, China’s GDP growth would have fallen further.
My personal prediction is that over the next 2 or 3 years, performance in China is not likely to
improve because of the following reasons 1) Potential real estate housing bubble (60 million
empty apartments await buyer, 2) Manufacturing dependence, over capacity, 3) Slowdown
in exports and imports, 4) Lack of driver, of growth Catalysts and 5) Investment is much larger
than consumption as a percentage their GDP. Note that these factors in themselves entail a
lot of analysis and hence we just take the key points without dwelling much into it. That being
said I will be more than happy to talk to any reader who wants to learn more about those
resounding factors.
India’s Current Economic State
India can be analogized to an Elephant riding in a wave of optimism albeit vulnerabilities
associated with persistent currency devaluations, economic slowdowns and persistent
inflation in the last 3 years. “Encouraged by the greater macro-economic stability and the
reformist intent and actions of the government, coupled with improved business sentiments
in the country.” Institutions like the IMF and the World Bank have presented an optimistic
growth outlook for India for the year 2015 and beyond. The possible headwinds to such
promising prospects, however, emanate from factors like inadequate support from the global
economy saddled with subdued demand conditions, particularly in Europe and Japan, recent

4. slowdown in China, and, on the domestic front, from possible spill-overs of below normal
agricultural growth and challenges relating to the massive requirements of skill creation and
infrastructural up gradation. The encouraging results from the Advance Estimates for 2014-
15 suggest that though the global sluggishness has partly fed into the lacklustre growth in
foreign trade; yet this downward pressure has been compensated by strong domestic
demand, keeping the growth momentum going
Key Numbers and Facts for the Manufacturing Sectors (Indian Budget Volume 2)
 The PMI has risen from 52.9 to 53.3 which is signs of growth in the private sector. We
however do see that the manufacturing sector has outpaced the service sector at the
beginning of 2015Q1.
 a growth of 6.2 per cent and 5.3 per cent respectively in 2012-13 and 2013-14
 growthin manufacturingsectorwaschieflyonaccountof robustgrowth intextiles,apparels,
and leather products
 The upwardrevisioninmanufacturinggrowthinthe newseriesalsoowestoinclusionof trade
carriedout bymanufacturingcompaniesinthe manufacturingsectoritself,whichwasearlier
part of the services sector.
Key Numbers and Facts for the Service Sectors (Indian Budget Volume 3)
 Indian services companies reported sustained growth of new business in January, extending
the current sequence of expansion to nine months
 Inputcostsfaced by Indianservicesfirmsroseforthesecond straightmonthin January,having
fallen for the first time in more than five-and-a-half years in November.
 The rate of costinflation picked up to the sharpest in six months,althoughremained muted in
the context of historical data
 A factorthatmay be concerning is that job creation rate wasslower than historicalaverages.
Weakest sectorial performance was financial services
Figure 4 CPI Trend (downwards and promising)
The figure above shows how inflation now is more controlled and pronounced. There
is a steep decline from Q42014 to Q1 2015. Though discussed later, India’s economy
is highly dependent on oil imports just like any other developing country. Sharp fall in

5. commodity prices not only propelled the manufacturing sector but it also controlled
inflation.
Figure 5 Current Account
Key FactsaboutCurrentAccount
 2012 and 2013 sawthe wideningof thisdeficitmainlybecauseof currencyfluctuationsand
increasingimports
 In 2014/2015 lowertrade deficitalongwithmoderate growthininvisiblesthatresultedin
lowerdeficitandsurge in capital inflows,enabledbyhigherportfolioinvestment,foreign
directinvestment(FDI),andexternal commercial borrowings(ECB)
 Amongthe major economieswithaCAD,Indiaisthe secondlargestforeignexchange
reserve holderafterBrazil.India’sforeignexchange reservesatUS$ 330.2 billionason6
February2015 mainlycomprisedforeigncurrencyassetsamountingtoUS$ 305.0 billion,
accountingforabout 92.5 per centof the total.
 Withincrease inreservesinthe firsthalf of 2014-15, all reserve basedtraditional external
sectorvulnerabilityindicatorshave improved
 USD andRupee exchange rate hasremainedstable.Rupee hasappreciatedwrttothe Euro
and Yenowingto theirweakoutlook.
Improvement in thisaccount is a positive for the economy for the years to come. We normalize the
effects of commodity prices and currency fluctuation to come to that conclusion

6. Figure 6 India's GDP growth looks promising and 2016 mayeven hit double digit growth
‘The economy has been balkanised by local taxes levied at state borders, but cross-party support
for a national goods-and-services tax could create a true common market. The potential is there;
the question has always been whether it can be unleashed.’
Recap of Key pointsfrom India’s Budget
Arjun Jaitley- India’s finance minister recently unveiled the 2015 budget for the country. We
will recap the key factors to take from this from an international investor’s perspective. The
total size of the budget was $290 billion.
Tax- Corporate tax rates have reduced by 5% to now 25% over the next 4 years. The purpose
of this is for boost in spending and job creation. Prior to this change India’s corporate tax rates
was 33.99 percent, including various surcharges over the base rate, was higher than Asia's
average corporate tax rate of 21.91 percent in 2014, and a global average of 23.64 percent,
according to consultant KPMG. The importance of this news can be seen by how the Sensex
(Bombay Stock Exchange) shot up by 250 points. Thus not only will this increase value of
revenues for firms in India but it alsowelcomes foreign investment. There is room for personal
tax cuts, which willboost real income boosting the domestic economy. This is likely to happen
in the following years, considering the vastness and size of the Indian economy this can be a
real GDP per Capital booster. There was a complete abolition of the wealth tax.
Infrastructure - The budget included more than $11 billion in new infrastructure spending
aimed at upgrading the country’s overloaded roads, railways, ports and power plants. “I
think we’ve done a number of things here that are truly ground-breaking,” said Jayant Sinha,
the minister of state for finance, on Sunday. He cited the increased share of total tax
revenue being transferred to state governments and the creation of a sovereign-wealth
fund to invest in large infrastructure projects. The key impact of such investment projects in
boost in growth and attracting more investments.
Alternative Investment Funds- category of pooled-in investment vehicles for real estate,
private equity and hedge funds, is expected to give a boost for private equity industry in

7. India. The basically makes it easier for domestic investors , but the 2 existing vehicles (
Foreign Direct Investments and Foreign Portfolio Investors) will be removed making the AIF
the all inconclusive vehicle for foreign investors as well. The AIF’s come in 3 categories 1, 2
and 3.
Growth Factors and Catalyst 2015 and Beyond
Average workforce age- roughly half of the population of 1.25 billion is under the age of 25.
The people in India are entrepreneurial and the more the workforce gets trained the better
the future reduction in unemployment. The government has increasingly taken interest to
nurture the nation’s youth to take any economic opportunities that may arise. The formation
of the National Skill Mission that will consolidate efforts and outcomes and budgetary
allocations to financially support youth in their skilling efforts will enable the country to
benefit from its demographic dividend. The focus on job creation through the Make in India
program, and providing gainful employment to India's youth is commendable and a future
oriented outlook. The global economy is going to witness a shortage of young population by
2020 while India will be the one country youth surplus of 47 million. “India would need is that
these ‘surplus’ young people are healthy, suitably educated, and appropriately skilled to
contribute optimally to the economy.”…as stated by its 2015 Economic Survey.
Figure 7 GDP per Capita, shows increase in consumption likely in the future
As an oil importer- With commoditypricesranging onthe lower side, India willbenefit for this inthe medium to longterm.
Remember that India is a net importer of Oil, andthe lower commodityprices reduces its overall imports andflushes it
with more foreigncurrency. This mayhave aneffect of keeping its currencyrelativelystable whichis imperative for its
success inthe next 3 to 5 years.

8. Modi Effect-
Figure 8 Impact of Politics,Positive Modi Effect
How India has responded to government reforms
Narendra Modi’s India’s prime minister’s dynamic nature with expectation of reforms
increases the necessary hope the country needs to engage its resources. Over the past year,
since he was elected into power his main focus have been civil reform and structural
changes. The budget under Jaitley was the first reform outside the above mentioned facets
and personally I am very optimistic about. Arun Jaitley has pledge plans to create 100000
km’s of roads and commission five "ultra mega" power projects to help end electricity
shortages. The delay in deficit reduction gives the public sector the necessary kick-start it
needs to be the engine of growth.
India’s Equity Market Outlook. - Outperformer in 2014 despite weaker earnings in 2014Q4

9. Figure 9 Equity Market India
‘India is riding a waveof optimismafterpro-businessNarendra Modiwon theelections.Indian debt
lookslike good valuewithinflation falling.Robustearningsgrowth supports(pretty heady) equity
valuations,butvisibleprogresson reformsis needed formarketsto advancefurther’
The key driver to the Sensex last year was FDI’s and with our thesis before of potential
increased investments we project Indian equities to do better this year. The relative pricing
of Indian stocks may be high as the market trades at around 16 times.
Thispresentsagood entrypositionforinvestors,asthe budgetisprojectedtocause the Indian
marketto be lowerby150 pointsbythe endof the year.

10. Stock Picks
Larsen & Toubro (LTOUF)
ICICI Bank (IBN),
IShares MSCI India ETF (INDA)
HDFC Bank (HDB)
Sector Picks
Banks
Transportation
PowerStocks
Tech
Conclusion
Government reforms in the backdrop, its commitment to growth and investment might bolster the
Indianeconomyinthe longrun. The external sectorincludesthe optimisticmacroeconomicoutlook,
oil prices remaining relatively low and stable. We must not ignore uncertainties surrounding
conditionsinthe Eurozone,Greece.The likelihoodthatinterestratesinthe UnitedStateswillincrease
are factors tobe incorporatedinanyevaluationthatistobe done withthepricingof assets. Giventhe
above, and assuming normal monsoons better prospects in the world economy that could provide
impetusto higherexportsforIndianproducts and services,a growth of around8.5 per centis in the
realm of possibility in 2015-16. From my analysis, I would rank India as one of the most attractive
investmentdestinations,well above othercountries. Itrankswell abovethe mean for its investment
gradecategory, and also abovethemean fortheinvestmentcategory aboveit(on thebasisof thenew
growthestimates). The realityandprospectof highandrisinggrowth,combinedwithmacroeconomic
stability, is the promise of India going forward. The key will be the response of savings to improved
price andfinancial marketstability,andof investment,particularlyinthe crucial infrastructuresector,
to reform efforts of the Government that are underway.