Indian equities have had a torrid time in recent months. Investors have recently started to sour on Indian PM Modi, worried that he’s rather more interested in staying in power as a Hindu nationalist rather than rule as a wise, technocrat interested in reform. In a sense, this is one part of a wider investment narrative malaise which pins the desirability of an asset class on politics. I’ve grown wary of the influence of politics on investment outcomes in recent years and think it is increasingly the refuge of the speculative scoundrel. Who the hell knows what goes on in the mind of the populists? Better to remain focused on investment fundamentals and only worry about politics when it truly produces an economic shock of some kind. In sum, populists thrive on controlling the narrative but in reality very little changes beneath the surface. And that seems to nicely sum up recent worries about India. Lots of positive talk but the domestic economy still faces the same challenges it is faced for decades.
Anyway, my wariness did receive a bit of a battering with the news that the Indian government has drastically cut corporation tax. India slashed its headline corporate tax rate to 25% from 30% and lowered the effective corporate tax further for domestic firms incorporated on or after 1 October to 17%, with the condition that they begin production by March 2023. The 17% rate is less than in many rival countries according to London based research firm Lalcap.
Even I concede this is a real and valuable reform though I have more doubts about its effectiveness long term. The always excellent David Cornell, fund adviser to India Capital Growth nicely summed up when he says that this is a reassuring act.
“It underscores Modi’s belief the corporate sector will create jobs and increase spending, both key to a revival in confidence. But…more needs to be done to resolve bad debt issues and especially confidence in the financial and power industries….We believe these measures will lead to an across the board 9% boost to the bottom line of corporate India. The biggest immediate beneficiaries will be consumer discretionary and banking. Any new investment in manufacturing will enjoy a rate cut from 25% to 15%, making India’s tax rates globally competitive at a time when investment into China is under threat….And the cost? This is estimated at 0.8% of GDP. We anticipate a renewed privatisation push to help fund the shortfall. Oil & gas and shipping companies will be considered, including Air India.”
David Cornell, Ocean Dial
Lalcap in London also observes that this tax cut will “help its smartphone industry expand, fuel research and development (R&D) investment and attract higher-value component makers. Indian smartphone maker Lava and China’s Xiaomi said the tax cut would help them generate more employment and step up investments in local R&D. Xiaomi, India’s top smartphone player, makes 99% of its devices locally through contract manufacturers and recently helped its supplier Holitech — a maker of camera modules and other parts — to set up a plant in northern India. The tax cut will attract makers of components like phone display panels”.
But this same Lalcap also contained another interesting factoid. It reported on the annual list of best cities to do business in, produced by the Z/Yen think tank alongside Long Finance. Its one of many indices that track an important fact of life – forget the politics, how easy can business get done in a big city. It’s the soft infrastructure of commerce that matters here more than the words of politicians. As you’d expect China continues to do well for an emerging market, but India is well down the list. Gujarat moves up 3 places to 66, Mumbai moves up an impressive 20 places to 72. India seriously lags behind China is Lalcap’s observation. Too true!
Which brings me nicely to Turkey. The near eastern state has been the victim of my political narrative. I have no time for its omnipotent ruler Erdogan and hope that the emergence of opposition within the AK party ranks is the sign of long-term hope. I also think that his big policy moves in recent years have been terrible for the Turkish economy and that his move away from a Western policy framework to one that is almost pro-Russian (though still a member of NATO) is incredibly foolhardy. Still, that’s Turkey’s choice.
Investors have reacted with barely concealed horror, selling down Turkish equities, dumping Turkish bonds and forcing through repeated devaluations of the Lira. Some of that opprobrium is deserved. Erdogan may admire Putin, but he’s not remotely as fiscally conservative as the Russian leader.
Nevertheless, my impression is that as long as you have no strong anti-AK party sympathies, Turkey remains a great place to do business. I would even go so far as to say that it is still a much better place than India. Much of India remains mired in woolly protectionist, quasi socialistic, state-centered economic thinking whereas at least Erdogan’s supporters are generally fiscal moderates who have zero sympathy for socialism (excepting their weird romance with Venezuela).
Two small pieces of evidence. The first is that city survey from earlier. I note that Istanbul for instance still outranks all the Indian cities and is currently at number 53 in the tables. Not great but not terrible. I note with interest that KL in Malaysia ranks even higher at 45 – Malaysia is still my favorite emerging market.
Another small bit of evidence comes from a Renaissance Capital report put out last week called Istanbul Calling. There are obvious warnings in the report, namely the following:”
“None of the private sector economists we met were convinced that Turkey has found a new non-credit-fuelled growth model. The government is using macroprudential levers to nudge the banks towards a 10-20% loan growth target but loan demand is subdued and corporate deleveraging pressures remain, suggesting only a gradual growth acceleration into 2020 and thus potentially only limited C/A deterioration from a strong starting point (Turkey has been running a 12-month C/A surplus since June, for the first time in 17 years).”
This warning notwithstanding, the report does find some hope. Fiscal growth is helping to stabilise the economy – “Consensus among private sector economists, think tanks and international institutions we spoke to was for 3% GDP growth in 2020 (the government is targeting 5%).”
The other key positive is that inflation is well and truly under control, with evidence of disinflation in some parts of the economy. The report suggests that YoY inflation might stabilize around 10% and could even hit as low as 5.4% for end-2021. If Turkey can tame those inflationary demons, hopes for a recovery remain on track.