India's investment unlikely to pick up in 2014: Credit Suisse

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India should be relatively immune to the taper: Credit Suisse India should be relatively immune to the taper: Credit Suisse
SummaryNo correlation of growth with govt form or colour

Elections and the taper do not matter much. These two most significant ‘known unknowns’ in 2014, in our view, will have limited impact on the economy and earnings. We find no correlation of growth with government fragmentation or its colour, and that India should be relatively immune to the taper. Both events may drive volatility given set expectations around their impact, but the market should revert to the trend soon after.

India Growth outlook

*Broad macroeconomic trends to continue. We expect the divergence in fortunes of large-scale investments and middle-income consumption on one hand and low-income consumption on the other to continue. The investment cycle is unlikely to pick up anytime soon, and middle income consumption growth is likely to stay subdued until the formal economy recovers, or until the 7th Pay Commission becomes effective. Growth in the informal economy though should continue to drive wage growth for the poor.

*Changing palette—market upside, but stay defensive. Indices have already started to reflect this divergence: consumption and exporters have gained weights from industrials, materials and banks. We are constructive on the broader market: (1) MSCI India P/E is 15% below its adjusted average, (2) consensus EPS has downside, but 6-8% index EPS growth is still likely. But our model portfolio is positioned defensively. Reliance, GCPL, HCLT and ITC are our top long ideas and L&T, Tata Steel and SBI our top shorts.

Elections and the taper: Overhyped ? The two ‘known unknowns’ in 2014 have limited impact on the economy and earnings. The market should revert to the trend soon after these events. Our analysis suggests that the fragmentation of the central government (i.e. number of parties coming together) has no correlation with GDP growth and market performance. The three major reasons for this are:

(1) state governments drive execution, whereas the central government just drives policies. The strong divergence in state-wise growth rates suggests state governments matter more; (2) Elections are not contested on economic ideologies but on caste, religion and local issues. This may be a flawed system, but the unintended benefit is the ruling party can do what is economically necessary without worrying about voters; and (3) Central government action can take six-eight years for a meaningful impact.

India will also be much less impacted when the Fed starts its taper than is feared. The current account deficit has shrunk substantially, and we

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