Aberdeen Standard Turns Defensive on India on Absent Demand Push

(Bloomberg) -- Aberdeen Standard Investments Ltd. has adopted a “defensive stance” toward India over the short term as government measures to support the economy have fallen short of reviving demand with lacking key reforms.

Prime Minister Narendra Modi last month declared a $265 billion rescue package -- equivalent to 10% of gross domestic product -- to help support businesses hit by one of the world's strictest stay-at-home order as the nation grapples with an increase in coronavirus infections. Yet almost half of the stimulus comprised monetary measures announced since February.

“We view the package as a tad underwhelming, given that it does little to boost demand or relieve stress for companies and sectors that have effectively come to a standstill during the lockdown,” Kristy Fong, senior investment director for Asian Equities, said in an email. It also lacked tax breaks or a plan for infrastructure spending and reforms to support the manufacturing sector.

The money manager, which oversees over $644 billion of assets globally, now has “heaviest exposure” relative to the benchmark in software exporters, materials, especially cement, and consumer staples. It expects stocks to remain volatile while the outbreak likely to be a hindrance to global economic recovery.

“State coffers have been hurt by the coronavirus relief measures, further limiting fiscal levers,” Fong said.

Moody's Investors Service on Monday downgraded India's credit rating to the lowest investment grade, citing a prolonged slowdown and rising public debt. The benchmark equity indexes took it in their stride by rising 1.6% on Tuesday, and advancing again on Wednesday, though they remain vulnerable to actions from S&P Global Ratings and Fitch Ratings, which might change their outlook to negative in light of the risks flagged by Moody's. The nation's manufacturing PMI remains close to historic lows and is in contraction territory for a second-straight month.

“Worries over the slowing domestic growth, as well as concerns over the liquidity and solvency of the non-bank financing sector, persist,” she said.

Here are some highlights from the interview:

Government mainly focused on “bumping up” minimum wages, rather than trying to address rigid employment laws that have hurt investments and productivity, keeping manufacturing, in particular, sub-scale in India
“Outside of the stimulus package, the accompanying labor reform comments sounded exciting at the outset, but the government now appears to be back-pedalling, saying that it is a matter for parliament.”
Divestment of state-owned enterprises and measures to attract foreign investments could narrow the fiscal gap