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Indian Equities

2019 was an eventful year for Indian equities, as they posted moderate gains  amid a raft of global challenges and domestic opportunities. The National Democratic Alliance (NDA) was elected for a second term in April. After some initial hesitation, it embarked upon an ambitious reform agenda, including privatisation of state-owned enterprises and supply-side reforms such as a reduction in the nation’s corporate tax rate. In this 2020 outlook, Rana Gupta, India Equity Specialist, explains why Indian equities are poised for continuing positive performance this year on the back of long-term structural opportunities provided by the “3R’s” (Recycle, Rebuild, and Reinvestment) and positive cyclical catalysts.

2020 investment opportunities based on the existing growth foundation

Our 2020 outlook is based on our long-term view of the opportunities in Indian equities that will emerge over the next three-to-five years. In particular, we believe that investors should understand how previous government structural reforms over the past three years, which we refer to as the “4F’s”2, laid a critical foundation for India’s economic growth agenda. As a result, India’s economy has become more formal with better public infrastructure and healthier private-sector banks. 

The “3R’s” can drive opportunities in 2020 and beyond 

With these fundamental building blocks in place, we believe that the Indian government has a unique opportunity to revitalise investment-led economic growth through the 3R’s: Recycle, Rebuild, and Reinvest3:  

  • Recycle – Funding the government’s spending needs through the sale of state-owned enterprise (SOE) assets.  
  • Rebuild – Aggregating savings by providing tax cuts to corporations and the middle class. 
  • Reinvest – Providing incentives for manufacturing firms to reinvest such savings to substitute imports and increase the country’s global market share of exports. 

In 2019, the government has made notable progress with this agenda, including the selling of   SOE assets, slashing the corporate tax rate from 30% to 22%, and offering newly-incorporated manufacturing firms a preferential tax rate of 15%4. Further reforms to improve the business environment were also introduced5.  Finally, we are closely watching the government’s progress on labour reform: A bill was recently introduced to simplify many of the country’s rigid labour laws.

Structural and cyclical factors compose positive macro backdrop in 2020

In 2020, we believe that the Indian government will propose further reforms based on the 3R’s. These should provide a virtuous growth cycle that not only improves India’s near-term growth prospects but also increases the country’s long-term competitiveness on a structural basis.

In 2019, we saw an active government policy response to decelerating economic growth: active fiscal policy (including tax cuts) coupled with monetary easing by the Reserve Bank of India (RBI)’s multiple rate cuts6 and monetary intervention. 

This year, we expect to see positive cyclical factors emerging from fiscal impulse and lower interest rates. Although the corporate tax cuts may lead to a moderate rise in the fiscal deficit, our estimate has risen from 3.3% of GDP to 3.7%. We envisage only mild pressure on both rates and the rupee, as benign global liquidity and decelerating domestic inflation afford room for the RBI to continue with its accommodative policy. 

Overall, we expect GDP growth to bottom out during the fourth quarter of CY72019 and gradually recover from the first quarter of CY2020 onwards. We also expect Indian equity earnings growth to pick up in 2020, led by improving growth, lower interest rates, and a reduced tax burden. 

Government policies are addressing transient challenges

Despite this favourable macro backdrop, we believe investors should also pay attention to a number of near-term transient challenges that will continue in 2020.   

Government reforms have notably bolstered the formal sector over the past few years; however, income levels in the informal sectors have moderated over the same period. Meanwhile, agricultural income has also stagnated due to lower food prices. 

The Indian government has responded by introducing middle-class tax cuts and programmes designed to bolster the income prospects for farmers (PM-KISAN8). These measures, coupled with better rainfall during monsoons and other welfare measures focused on housing and health, have effectively addressed such challenges. 

Other significant challenges include credit growth and market liquidity. Credit growth among Non-Banking Financial Companies (NBFCs) has steadily declined due to a freeze in the wholesale money market during most of 2019. Recently, two government-sponsored schemes targeting NBFCs and uncompleted real estate projects (which had loans from NBFCs) have led to lower financial stress and some signs of thawing of the wholesale money market.    

Constructive on companies that can benefit from the 3R’s

We are generally constructive on companies with one or more of the following attributes that can benefit from the 3R’s investment theme: 

  • Economic formalisation should continue. We envisage that formal companies should continue to gain market share from less formal companies. 
  • Businesses that were heavily taxed will now receive large tax savings to reinvest; 
  • Businesses with the opportunity to deploy cash through increased capital expenditures that can boost growth (due to the lower corporate tax rate on new investments,  incremental returns should be higher); 
  • Domestic manufacturing-related companies that can substitute imports and competitive export products. 

At the sector level, we are positive on large private sector banks. We expect that they may gain deposit and loan market share, as well as benefit from potential lower credit costs. We also like building materials where lower interest rates should drive real-estate demand. We have already seen a significant improvement in the affordability of real estate and inventory levels have corrected. 

From an import substitution angle, we like select consumer durable companies; from an export point of view, we like engineering and chemical companies where India is slowly gaining global market share. 


Overall, we believe Indian equities are poised for further gains in 2020.  Structurally, the 3R’s provide a robust framework to continue important reforms.  Cyclically, potentially faster economic growth, coupled with flexible fiscal policy and accommodative monetary policy, should boost economic prospects.  When combined, these positive factors should provide ample opportunities for investors in 2020.

Rana Gupta, India Equity Specialist
  1. MSCI India posted a year-to-date gain of7.67% through 18December 2019, Bloomberg, total return returns in US dollars.  It is not possible to invest directly in an index.  
  2. Manulife Investment Management: Four F’s are key positive drivers for Indian equities. 19 January 2019. The Four "F's" are Formalisation, Fiscal stability, Financialisation, and (Re)Forms on banking asset quality.
  3. Manulife Investment Management: “India’s unique opportunity to lift growth”, 10 May 2019. 
  4. These reforms were announced in October 2019, with the manufacturing incentives valid for newly incorporated firms after 1 October 2019 and starting production before March 2023. 
  5. As per the World Bank’s latest Doing Business Report, India has recorded a jump of 14 positions to 63rd rank among 190 countries against its earlier rank of 77. In terms of parameters, India’s performance improved in 7 out of 10 indicators with significant improvements registered in ‘Resolving Insolvency’, 'Dealing with Construction Permits', ‘Registering Property’, ‘Trading across Borders’ and ‘Paying Taxes’.
  6. The RBI cut interest rates by 135 bps in 2019. 
  7. CY is the acronym for calendar year.
  8. Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) is a Central Sector scheme with 100% funding from Government of India. The Scheme is effective from 1.12.2018. Under the Scheme an income support of Rs.6000/- per year is provided to all farmer families across the country in three equal installments of Rs.2000/- each every four months.


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The VHIS Office recently discovered a translation error in the Chinese version of the Schedule of Surgical Procedures of the Certified Plan Policy Template. In the fracture/dislocation section of the Surgical Schedule, “clavicle” on the 8th and 12th items was mistranslated as “scapula” and “scapula” on the 13th item was mistranslated as “clavicle”. Manulife has reviewed and revised the relevant product information of Manulife’s VHIS certified plans upon the VHIS Office’s request, and has revised the Chinese version of the certified plans’ policy provisions accordingly. The English version of the policy provisions is not affected. For any enquiries, please contact Manulife’s service hotline at 2108 1188.

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The VHIS Office recently discovered a translation error in the Chinese version of the Schedule of Surgical Procedures of the Certified Plan Policy Template. In the fracture/dislocation section of the Surgical Schedule, “clavicle” on the 8th and 12th items was mistranslated as “scapula” and “scapula” on the 13th item was mistranslated as “clavicle”. Manulife has reviewed and revised the relevant product information of Manulife’s VHIS certified plans upon the VHIS Office’s request, and has revised the Chinese version of the certified plans’ policy provisions accordingly. The English version of the policy provisions is not affected. For any enquiries, please contact Manulife’s service hotline at 2108 1188.

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