Alger Emerging Markets Outlook

OUTLOOK 4/8

In conjunction with the Unique Identification Number (Aadhaar), there is hope that the GST will help address system “leakage” or corruption, thereby enabling the entire amount of government subsidiaries to reach intended beneficiaries.

is likely to be limited, which could give the country’s central bank room for cutting rates. Oil remains important to the Russian economy and the government’s coffers. With oil priced at $42 a barrel at the end of 2017, Russia is expected to maintain fiscal restraint. At the same time, the Ministry of Finance has indicated it wants state-owned enterprises to increase their dividend payments from the current requirement of at least 25% of IFRS net income to 50% to further support the country’s revenues. Execution of Policy Changes Will Be Crucial for India Our constructive view on India is tempered by stretched valuations. As of the close of 2017, Indian equities had a price-to-earnings ratio of 18.7% compared to the 12.4 P/E of the overall emerging markets index. Prime Minister Narendra Modi’s government has pursued material policy changes that have laid the foundation for medium term growth while the implementation of these initiatives has caused short term weakness and “growing pains.” In late 2016, Modi’s government enacted demonetization, which was one of the most dramatic anti-corruption actions on currency to have occurred anywhere. Modi abolished Rs500 and Rs1000 rupee notes to combat illicit trade, counterfeiting, and other crimes. With the disruption from the initiative having largely passed, investors are now assessing the Goods and Services Tax (GST), which created a common tax system to increase efficiency, transparency, and productivity. In conjunction with the Unique Identification Number (Aadhaar), there is hope that the GST will help address system “leakage” or corruption, thereby enabling the entire amount of government subsidiaries to reach intended beneficiaries. More recently, the government has proposed a bailout of public sector (PSU) banks amounting to a possible $32 billion USD equivalent program that would address non- performing assets and strengthen banks’ capital to expand credit availability. In the meantime, credit demand is weak (See Figure 4). Government spending has increased only marginally in the fiscal year 2019 budget. This will need to be watched because spending has historically increased ahead of national elections. With India importing approximately 82% of its oil needs, rising petroleum prices combined with expansionary fiscal policy are a concern for investors. Modi is unlikely to risk going into the 2019 polling with a weak economy, so 2010 Source: Bloomberg. India loan growth is based on the year-over-year change in credit provided to the commercial sector. Year-Over-Year Change (%) Figure 4 India Loan Growth 0 5 10 15 20 25 30 2018 2016 2014 2012