India exemplifies EM appeal

19 mar 2018

Key points

  • Rising trade risks do not shake the strong case for emerging market (EM) equities. India’s reform-driven, self-sustaining growth is a case in point.
  • Political headlines dominated last week and equity volatility steadied. The Treasury yield curve flattened. U.S. equities saw strong inflows.
  • The Federal Reserve is likely to increase rates this week, and markets will probably have to adjust their 2019 rate expectations higher.

EM equities are still looking good, trade risks or not. A healthy global economy offers support while structural reforms are putting domestic growth on a self-sustaining path in key countries. Case in point: India. A brightening economy is boosting earnings expectations and, we believe, offers a cushion against potential trade-related shocks.

Government subsidies as a share of Indian GDP, 2008-2017

Government subsidies as a share of Indian GDP

Sources: BlackRock Investment Institute, with data from Haver and the Reserve Bank of India, March 2018.
Notes: The dots represent government funding subsidies as a percentage of Indian gross domestic product (GDP).

The progress India has made in cutting back costly government subsidies on items such as fuel is a prime example of the advances being made in structural reforms under Prime Minister Narendra Modi. Subsidies as a percentage of gross domestic product (GDP) have declined in recent years, as shown in the chart. The government has also taken steps to plug leaks in the system by paying out subsidies directly, via bank accounts, rather than through agents or intermediaries. Measures aimed at increasing financial penetration and bringing swathes of the informal economy into the formal economy are supportive of long-term growth, in our view.

Go get ’EM

EM reform is not a new theme. But reform momentum has picked up significantly in a few major countries, such as China and India, fostering a more sustainable growth path. EM equities are coming off a stellar 2017, but we see room for more gains as investors flock back after years of EM under-allocation. India – among our favored picks within EM – is a good example of what is on offer.

The Indian government is tackling chronic low productivity, bad loans in the banking system and the bureaucratic barriers hampering the private sector. Social challenges exist – primarily job creation over the coming decades and lifting the rural economy out of its funk. There are no easy fixes, but we see signs of progress after a series of fits and starts. A national tax system for goods and services has replaced an inefficient structure of myriad rates and payments, offering the potential to boost productivity. Financial sector reform is particularly encouraging. A government-led capital injection into banks has helped to repair balance sheets. The clean-up of non-performing loans and banking sector recapitalization are clearing the path for private sector investments and a long-awaited capex recovery. Corporate earnings in India are looking up again, with analysts expecting 2018 earnings growth in the area of 21%.

The IMF sees India as the fastest-growing major economy in the world this year and next. We do not see a significant change in power in next year’s general election, but fiscal restraint could weaken heading into an election year. India’s large rural economy – stuck in a rut for years – appears to be the area of focus. Drawing workers away from low-skilled agricultural employment is critical for long-term success. We find India is less correlated to the global cycle than most EM peers and its domestic resilience underpins our confidence. The equity market is not cheap at 17.5 times forward earnings. But it remains one of our preferred markets in the emerging world due to its strong growth outlook and relatively low dependence on global trade.


March 20 Eurozone consumer confidence flash
March 21 U.S. Federal Open Market Committee(FOMC) rate decision
March 22 Bank of England monetary policy summary and minutes; Japan, U.S. and eurozone flash manufacturing PMIs
March 23 Brexit discussion at European Council Meeting after a transition deal struck; Japan Consumer Price Index (CPI)

We expect the Fed to announce another quarter-point rate rise at its policy meeting this week. We see the central bank following this up with an additional two to three rate rises this year, and a similar pace of tightening in 2019. Focus will be on the Fed’s “dot plot” – which depicts how individual FOMC members see the appropriate future path for rates. Attention is turning to the dots for 2019 and 2020. Markets are pricing in the likely rate path for 2018 but still need to calibrate for the less-clear, longer-run march higher in policy rates.

  • U.S. President Donald Trump named Larry Kudlow his top economic advisor and nominated CIA Director Mike Pompeo to replace Rex Tillerson as secretary of state. The UK expelled Russian diplomats and froze Russian assets after a nerve gas attack on a former Russian spy and his daughter on UK soil. The U.S. imposed new sanctions on Russia for 2016 election meddling. Speculation grew over potential U.S. tariffs on Chinese imports.
  • The U.S. Treasury curve flattened between two and 10 years as long-term yields fell and Fed normalization expectations held up the front end. Bond proxy stocks outperformed. The VIX volatility gauge stabilized in the mid-teens.
  • Flows into global equity funds were $43 billion in the week ending Wednesday, based on EPFR Global data. It was the biggest week since 2000 and was driven mainly by strong inflows into U.S. exchange traded funds.

Global snapshot

Weekly and 12-month performance of selected assets


EquitiesWeekYTD12 MonthsDiv. Yield
U.S. Large Caps -1.2% 2.9% 15.6% 1.9%
U.S. Small Caps -0.7% 3.5% 15.9% 1.1%
Non-U.S. World 0.2% 0.8% 18.8% 3.1%
Non-U.S. Developed 0.2% 0.0% 16.7% 3.3%
Japan 2.1% 1.6% 18.5% 2.1%
Emerging 0.5% 5.0% 28.8% 2.7%
Asia ex-Japan 1.7% 4.7% 31.2% 2.5%
BondsWeekYTD12 MonthsYield
U.S. Treasuries 0.3% -1.8% 0.5% 2.8%
U.S. TIPS 0.2% -1.6% 1.0% 2.9%
U.S. Investment Grade 0.2% -2.8% 3.1% 3.8%
U.S. High Yield -0.2% -0.6% 4.8% 6.2%
U.S. Municipals 0.1% -1.4% 3.4% 2.7%
Non-U.S. Developed 0.4% 3.1% 12.2% 0.8%
Emerging Market $ Bonds 0.1% -2.0% 4.9% 5.7%
CommoditiesWeekYTD12 MonthsLevel
Brent Crude Oil 1.1% -1.0% 28.0% $66.21
Gold -0.7% 0.9% 7.1% $1,314
Copper -1.1% -5.0% 16.6% $6,888
CurrenciesWeekYTD12 MonthsLevel
Euro/USD -0.1% 2.4% 14.2% 1.23
USD/Yen -0.8% -5.9% -6.4% 106.01
Pound/USD 0.7% 3.2% 12.8% 1.39

Source: Bloomberg. As of March. 16, 2018.
Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Bloomberg Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Bloomberg Barclays U.S. Corporate Index; U.S. high yield by the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Bloomberg Barclays Municipal Bond Index; non-U.S. developed bonds by the Bloomberg Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

Table: Asset class views from a U.S. dollar perspective

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Richard Turnill
Global Chief Investment Strategist
Richard Turnill, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy Function within the BlackRock ...
Isabelle Mateos y Lago
Global Macro Strategist, BlackRock Investment Institute
Isabelle Mateos y Lago, Managing Director, is a global macro investment strategist in the Investment Strategy team of the BlackRock Investment Institute. The ...
Kate Moore
Chief Equity Strategist, Americas
Kate Moore, Managing Director, is Chief Equity Strategist – Americas for BlackRock and is a member of the BlackRock Investment Institute. She is responsible for ...
Jeffrey Rosenberg
Chief Fixed Income Strategist
Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Investment Strategist for Fixed Income. His responsibilities include working closely with the Chief ...