US And India Remain Bright Spots In IMF Growth Outlook

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Includes: IBN, INDA, INFY, ITA, SPY, VCR, VDC, VHT, VIS
by: Disruptive Investor

Summary

IMF has cut global GDP growth forecast by 0.3% since its last outlook. However, the growth forecast for US remains robust amidst gloom for other developed markets.

China's GDP growth is likely to trend lower in 2015 and 2016 while India's GDP growth will trend higher. India is likely to beat China's GDP growth by 2016.

I remain positive on the US and Indian equity markets for 2015 and I am of the view that India can potentially be the best performing equity market in 2015.

I have been positive on the US economy and the Indian economy in several of my recent articles. I am of the view that the United States and India are likely to be best equity market performers in 2015 and I maintain that view.

My view is backed by the latest IMF global economic outlook. This article discusses the key points to note in the global GDP growth outlook and the investment implications.

The chart below provides IMF's revised global economic outlook for 2015 and 2016.

With China reporting its slowest GDP growth in 24 years, I will start with the outlook for emerging markets. After growing at 7.4% in 2014, China's economy is likely to grow at 6.8% in 2015 and 6.3% in 2016.

Therefore, the country's growth will remain sluggish in the coming years and this does not come as a surprise considering the manufacturing excesses and the failure of expansionary monetary policies to impact real economic growth.

As I mentioned in my recent article on China, the excess liquidity has manifested itself in the form of bubbles in different sectors with the real-estate sector and the Chinese equities being good examples.

As China tried to strike a balance between production and consumption, the economy is likely to remain weak in the coming years and I believe that 2015 GDP growth can potentially be weaker than expected by the IMF.

On the other hand, India is likely to grow at a robust pace in the coming years and I will not be surprised if India's GDP growth touches 10% in the next 5 years. For 2015 and 2016, India is likely to grow at 5.8% and 6.3% respectively. Therefore, by 2016, India's growth rate will be higher than that of China.

In one of my recent articles, I had explained why India is one of the most attractive investment destinations for 2015 and I believe that the attractiveness will sustain beyond 2015. In particular, Indian equities will be worth considering if the current government goes ahead with transformational policies that are likely to commence with the March 2015 budget.

Therefore, I am overweight India and underweight China and my view is that the next 1-2 years will see significant portfolio rebalancing with a greater weight towards India. The Indian stock markets are already trading near record highs, but the rally is far from over and strong growth in the coming years will take the Indian markets higher.

From an investment perspective, investors can also consider exposure to the iShares MSCI India ETF (BATS:INDA). The reason for considering this ETF is the fact that it gives broad based exposure to Indian markets (targeting large-caps and mid-caps). There is huge potential for growth among Indian mid-sized companies and this ETF can provide strong returns when economic growth drives overall corporate growth.

Among specific stocks, ICICI Bank (NYSE:IBN) is my top pick in the banking sector, being India's largest private sector bank. With a likelihood of another 50-100 basis points interest rate cut in 2015, ICICI Bank is well positioned to deliver strong credit growth and stock upside.

Infosys (NASDAQ:INFY) is my top pick in the IT sector with the company transitioning from a process oriented company to a innovation and process oriented company under the new CEO, Vishal Sikka.

Before talking about the developed economy, I want to mention here that IMF has lowered the global GDP growth forecast from an earlier estimate of 3.8% for 2015 to 3.5%.

However, even with a downward revision to the global economic forecast, the GDP growth outlook for the US remains robust.

The US economy is likely to grow at 3.6% in 2015 and 3.3% in 2016. I believe that this is excellent growth with the Euro Area likely to grow at only 1.2% and 1.4% in 2015 and 2016 respectively. I do believe that Euro Area growth will be lower in 2015 as political differences delay the stimulus that can provide some relief to the sagging economy.

Considering the latest growth forecast, the US remains as the brightest spot in the developed economy and the implications are positive for the US dollar and also for the US equity markets (NYSEARCA:SPY).

In my view, investors can consider selective exposure to US stocks even at current levels and I like the healthcare, defence and consumption themes for 2015.

While the healthcare sector contribution to GDP growth remains steady on the back of demographic factors, the consumption theme will do well with US consumer sentiment recorded at an 11-year high in January 2015.

Also, for 3Q14, the defence sector contribution to GDP growth swelled and I believe that this will sustain on heightened geo-political tensions globally that will aid defence sector companies.

For broad exposure to these sectors that look promising for 2015, investors can consider the Vanguard Health Care ETF (NYSEARCA:VHT), Vanguard Industrials ETF (NYSEARCA:VIS), iShares U.S. Aerospace & Defense ETF (BATS:ITA), Vanguard Consumer Staples ETF (NYSEARCA:VDC) and the Vanguard Consumer Discretionary ETF (NYSEARCA:VCR).

The IMF economic outlook projects recession in 2015 only for Russia. However, I believe that the Euro zone can also slip into recession with the Chief Economist from Markit suggesting the euro zone economy is likely to grow by just 0.1% in the fourth quarter. Therefore, even if the Euro zone does not slip into recession for the full year 2015, it is entirely likely that the region will have a quarter or two of negative GDP growth.

In conclusion, IMF's latest projections as well as economic indicators such as consumer sentiment and jobs growth point to robust GDP trend for the United States in 2015. In addition, India is a reforms driven story and the Indian markets can potentially be the best performer for 2015. For other markets, I would remain underweight at this point of time.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.