31 Dec 2012

2013 outlook

The year closes with the Nifty just short of the 6,000 level and index futures a touch over; daily market volumes have tailed off in the past few days but the year’s volume of portfolio (FII) inflows has reached almost $20bn, just short of 2010’s record level. After a difficult and volatile year, we arrive on the threshold of 2013 with a surprisingly optimistic outlook:

                Politics: the government has succeeded in sustaining its new-found reforming vigour with parliamentary successes
                Economics: inflation is now trending downwards so that the RBI will feel justified in kicking off a monetary easing cycle during the March quarter
                Markets: even as we flirt with 6,000 on the Nifty, index valuation remains comfortingly within its historic range

21 Dec 2012

Three questions

Down Jones' Financial News asked three questions. Ian McEvatt responded:

Q1: What is the biggest danger facing the financial industry in 2013?
A race to the bottom in regulation where Wall Street lobbying money dilutes US action, but European Union committees continue to burden the sector with punitive regulation. Business will migrate away from EU.

Q2: What single change would most transform the European financial markets for the better?
Equalize the tax treatment of interest and dividends and disintermediate the banks from controlling sources of finance, in favour of markets.

Q3: What is your New Year’s resolution?
Promote the cult of equity; it was debt that crippled the world but equity markets are the victims.

11 Dec 2012

Making progress, not there yet

Global equity markets were mostly in the black as US jobs data came in modestly positive and China’s PMI turned mildly expansionary in October. India had a good week in politics as the government managed to sustain its opening of the market in multi-brand retail FDI in both houses of parliament. Market sentiment was restrained nonetheless as the Nifty managed a gain of only 28 points. Daily trading volumes stayed up near last week’s level, at $2.9bn as FIIs were net buyers of $470bn of cash equity and domestic institutions sold a net $380mil. Advances outnumbered declines by 3 to 2 but the malignant effect of ETF trading was once again evident in the points’ contributions. Three counters representing just 14% of total index market cap added a total of 44 points while one stock subtracted 16; thus net of four stocks, the index trod water. Volatility as measured by the India VIX drifted between 14 and 17 but closed where it opened, at 15. Index futures closed at a premium of 1.5% to cash. With a degree of political calm now, external risks may be more of a factor in the near-term; monetary policy is the key market driver but it is still to early to bank on it. The “fiscal cliff” has not yet been avoided.

12 Nov 2012

New horizon in politics

The Congress party held a large rally in Delhi last weekend at which the PM, accompanied by Rahul Gandhi and the Finance minister, for the first time claimed a reformist mantle for the party. The parliament will convene for its next session at the end of the month. Congress is going to have to stand firm on the policy actions it took after the close of the last session. In December, we will see state elections in Gujarat which will probably see the return of first minister Modi and propel him into the national leadership of the BJP. This holds the prospect of galvanizing the opposition at a national level and offering voters a real choice in the elections which are due in 2014. This will be far preferable to a fractious collection of state level parties dominating the campaign with local interests. It is worth recalling that the BJP, during its period in office which ended in 2004, oversaw the last period of substantive reform in India.
In the short-term, we depend on the Finance Minster sustaining sentiment with investor-friendly policies until the RBI decides it can ignite the next monetary easing cycle, probably in the next quarter.

Stability all around

President Obama was re-elected comfortably but the Congress was effectively unchanged, so markets looked at the fiscal cliff and took a nosedive. The week ended with pretty much everywhere in the red. India only marginally so: the Nifty dropped twelve points to close 0.2% down at 5686 after trading in a range of 1.7%. Average daily trading volume stayed at the soft end at $2.3bn. On the downside, five stocks worth 23% of Nifty market cap cost the index 30 points while in the other direction, four stocks representing 15% of market cap added 24 points.
Following the relaxation of debt allocation norms, FIIs invested a net $1.5bn in Indian debt securities in October, the highest figure for eight months. The Finance Minister has convened two sub-committees to help resolve two key issues in fiscal consolidation. The first will be charged with determining compensation to states for loss of revenue from CST and the second will finalize the design of the eventual replacement: GST. The National Investment Board chaired by the Prime Minister, which is to provide single-window clearance for large infrastructure projects will be launched within three weeks. The Finance Minister says it is time to address the accumulation of wealth by introducing an inheritance tax. The government has approved the divestment of 10% of the equity in Hindustan Aerospace Ltd., India’s premier aerospace business. It has also approved a proposal to levy a $4.4bn one-time charge on mobile operators holding spectrum above a certain limit.

6 Nov 2012

A quite week, focus on politics

This was a quiet week globally, with investors watching in shock as the US east coast was devastated by hurricane Sandy, which shut the New York stock exchange for two days besides costing up to a hundred lives and causing tens of billions of dollars in damage. Decent US jobless and consumer confidence numbers were little consolation. Most markets were around a point or so in the black. Except China that which added 2,5% on signs of stimulus and a smooth transfer of power next week. India was in the ‘peloton’ with the Nifty adding 34 points to close 0,6% up at 5798 after trading in a range of 2.3%. Volume remained soft at € 2.2bn a day.
As expected, the policy sector dominated the news this week. The Prime Minister completed a cabinet re-shuffle, bringing in seven new cabinet ministers and fifteen new ministers of state with a much younger overall age profile. A number of key ministerial posts changed hands. The new names did not include Rahul Gandhi but several of the new younger appointments seems to be associated with his power base. It is now widely assumed that he will succeed Manmohan Singh as Prime Minister if Congress gets to form the next government in 2014.

26 Oct 2012

RBI expected to cut interest rates

Good Q2 results and continuing reforms by the Finance Ministry are expected to nudge the RBI towards a token interest rate cut.

Most markets closed last week in the red in spite of relatively positive GDP data in the US and UK. India was only marginally in the red, as the Nifty shed only 20 points, to close 0.4% down at 5,664 points.

About a quarter of index stocks have reported their Q2 results and positive surprises are running ahead of negatives by a comfortable margin. Good results were not confined to specific industries: companies in banking, construction, health care, technology, consumer goods and other sectors all reported improving results.

The Finance Ministry is scrutinizing departmental spending plans with a view to cutting expenditure which was committed in previous budgets. The Ministry has also accelerated negotiations with the states over the introduction of a national Goods and Services Tax. This is a key element of fiscal consolidation and is forecast to deliver a 1.5% boost to GDP on implementation, which may now come in FY14.

The 14% hike in the price of diesel fuel in September, which was the first decisive step in cutting the fiscal deficit, saw the growth in demand for diesel drop to 2.8%, the slowest rate for over a year.

Next week’s monetary policy review from the RBI will set the tone for the market for the rest of the year. Expectations have now broadly swung behind a token rate cut and another cut in the banks’ cash reserve ratio. The central bank may now feel obliged to row in with the recovery impetus given all the action under way at the Finance Ministry; inflation looks like heading into its comfort zone by year-end, so it may be willing to take the risk at this stage.

Himalayan Fund's full Weekly Market Commentary is available on the website.

19 Oct 2012

In quiet week, focus shifts to company results

The Indian stock market had one of its less exciting weeks, despite some interesting company news.

In the week ending 19 October, the Nifty added just 8 points for a gain of 0.1%, closing at 5,684 points as interesting new investment decisions emerged in the private sector. Reliance Industries followed up its recent good results with a plan to expand capacity at its Jamnagar refinery, the biggest and most efficient in the world. It is reported that Reliance is in negotiations with AT&T to sell 26% of its broadband service provider Infotel for $3.6bn. Jindal Steel and Power is believed to be in negotiations to acquire an iron ore mine in West Africa for $2bn, in order to meet demand for raw materials from its Indian and Omani plants. ICICI Bank has signed an agreement with Ecobank Transnational to provide banking services across their combined footprint in India and Africa.

Wholesale Price Inflation rose to 7.8% in September but the number accounts for almost the entire hike in the price of diesel; food inflation declined by 1.5 percentage points. This may reverse to some extent in October with the lower-yielding karif harvest and a seasonal surge in demand. By December, a bumper rabi crop, combined with a favourable base effect should help drive the WPI down to the RBI’s comfort range by March. Any evidence that this trend is assured may move the RBI to some form of easing and some analysts are expecting a gesture on Interest rates and CRR at the month-end monetary policy review. This would provide further underpinning to the market rally. In the meantime, we remain in the thrall of the newly-invigorated government. The Prime Minister is apparently ready to announce the launch of a national payments system based on Uniform ID card numbers; this is expected to curtail corruption in the payment of food, fuel and employment subsidies.

Himalayan Fund's full Weekly Market Commentary is available on the website.

10 Oct 2012

Optimistic outlook for the Indian markets

Over the next six months or so, we will see the markets supported by decisive government action which has gone some way to restoring investor sentiment. The proof of the pudding is in the eating: now we need to see some implementation. Some of the key reforms will require parliamentary approval but the government seems unusually determined to see them through. It must be working on the assumption that few potential opponents can countenance an election in the short term. This is because of lack of leadership, organization or funding. The odds of facing down troublesome opponents such as the Trinamool Congress look good.

The question mark is when will the RBI row in to launch a sustained cycle of monetary easing. The monsoon season, which ended with steady downpours which cut the expected deficit sharply, replenished reservoirs to  9% above the long-tern average and left soil in good condition for sowing. This promises an excellent rabi crop, which, combined with base effects will bring downward pressure on food inflation later in the year. This should allow the CPI to subside towards the RBI's target and allow the monetary easing the economy could do with.

So from where we are now, allowing for lumps and bumps caused by waves of concerns at the global level, Indian markets should be set for steady advances during the next two quarters. If the monetary easing follows as expected, the rally could be sustained well into next year.

Meanwhile, Himalayan Fund's board has taken steps to cut the expense ratio, which combined with the return of upward momentum in the market should help investor returns from this quarter on. Investment expenses have been set at a lower, fixed budget, allowing steady improvement in the TER as assets grow. The ride may be choppy but the outlook looks good from here.

5 Oct 2012

Is this rally one for the long run?

The Indian government continues its reform policies as a flash crash hits the stock market.

The Indian government’s new-found vigour sustained market sentiment as the Nifty index added 44 points to close 0.8% up at 5747, after trading in a range of 18.9%. This extraordinary trading range is due to a “flash crash” on Friday, October 5, as a series of erroneous trades worth about $125 million entered by a broker triggered a sharp selloff. Market circuit-breakers kicked in to close trading for 15 minutes but only after orders in the system were executed. The whole episode was over in a trice but the stocks involved saw wild swings in price; they included Reliance Industries and HDFC Bank.

The government kept up the reform momentum with a slew of decisions from Cabinet on Thursday, October 4. These include 49% FDI in insurance and an equivalent limit in the pension sector. Most beneficial in the long-term, the Cabinet approved the establishment of a National Investment Board under the direction of the Prime Minister, to monitor investment projects of more than $200 million. This offers the prospect of ensuring that bureaucratic bottlenecks are exposed to high-level remedy and progress can be maintained.

The final analysis of this year’s monsoon shows an overall deficit of 8%. This is far short of the drought earlier feared but the intense late rainfall guarantees a good late harvest. In the short term, there will be little relief for food inflation because of lower yields expected in the early harvest but as the year advances, inflation is expected to moderate with the second harvest. This should deliver conditions in which the RBI can ease monetary policy to boost the government’s efforts to revive growth.

So, for investors, the outlook is for the market to be sustained by policy and reform vigour in the short-term and by a long cycle of monetary easing further out. Meanwhile, imminent company results are expected to show subdued revenue growth but higher margins due to easing input costs. The recent rally may have a long run ahead.

Himalayan Fund's full Weekly Market Commentary is available on the website.


28 Sep 2012

Unblocking public sector infrastructure projects next step in recovery

On the back of mixed results worldwide, the Nifty index added 12 points in the week ending September 28 to close 0.2% up at 5,703 points.

Accompanying the recent economic policy and reform rush came news that India’s current account deficit narrowed in the quarter ended June: RBI figures show a broad trade gap of $16.4bn in Q1FY13 compared to $21.7bn in Q4FY12. During the period in question, the Rupee was fairly stable at its recent lows; also, the oil price was soft and gold imports dried up in the face of increased duty rates. Commodity prices are softer again now and the Rupee’s advance should help the import figures in the quarter just ending.

Meanwhile, policy moves to help the foreign reserves continue to emerge, as the government cut the withholding tax on external commercial borrowings from 20% to 5%, making it easier for Indian companies to borrow abroad. The clarification of FDI rules in single-brand retail has generated a rush of application from high-profile brands. In multi-brand retail, Walmart is expanding its wholesale cash and carry venture with Bharti Enterprises and said that its decisions on where to open stores will not be driven by politics.

Moody’s confirmed India’s medium term sovereign rating as “stable” at Baa3. It expects GDP growth to recover on the back of consumer demand. The monsoon is coming to an end with an overall deficit of rainfall around 7%. The late rains will bring relief to the food inflation numbers later in the year. These are now expected to fall sharply into single figures by the last quarter of FY13, allowing the RBI to cut policy rates later in the year.

Given the sustained improvement in market sentiment resulting from recent government action, this bodes well for equity returns in the medium term. Further government action which is expected to unblock public sector infrastructure projects is now the key to reviving private sector investment, eventually driving a recovery in GDP growth towards 8%. The overall market tone has improved considerably and momentum looks sustainable.

Himalayan Fund's full Weekly Market Commentary is available on the website.


21 Sep 2012

Indian Reforms Pick Up Speed

The government has shown unusual fortitude in implementing its proposed reforms, including privatisations and the relaxation of rules for foreign retailers.

Most markets closed the week on Friday, September 21 with modest losses except for China and Russia which had sharp pullbacks. India was an exception with a 2% gain. The Nifty index added 113 points to close 2 at 5,691 points.

The government continues to be the main object of attention as it maintains a frenetic pace of decisive policy action and market reforms. So far it has had the desired effect of boosting market sentiment and stimulating foreign investment flows.

The Cabinet has approved disinvestment in public sector businesses including Hindustan Copper, National Aluminium and Oil India. Meanwhile, the rules for allowing retailers like Walmart, Carrefour and Tesco to set up stores in India have been made official in the dozen states which are participating. It is expected that they will be adopted by more states as time passes. Relaxed conditions for single-brand retail have also been notified, along with the rules for 49% FDI in airlines and liberalization of access rules in the broadcasting sector.

Wholesale inflation is still above the RBI’s 7% comfort level. The central bank was therefore not tempted to follow the Finance Minister’s action agenda with a cut in policy rates but it did signal approval of sorts with a token cut in the banks’ cash reserve ratio (CRR) to 4.5%. This will release about $3bn of additional liquidity into the market, probably encouraging the banks to cut lending and deposit rates.

The government has shown unusual fortitude in standing up to demands to roll back its latest policy and reform moves. One coalition partner has already jumped ship but despite a day of protest strikes, it is unlikely any of the opposition wants an early election.

Himalayan Fund's full Weekly Market Commentary is available on the website.

7 Sep 2012

Public Sector Undertakings To Step Up

Finance Minister Chidambaram is to meet with PSU CEOs to discuss privitizations.

This week, the Indian stock market was driven by expectations for decisive policy action by the ECB to sustain the Euro and the announcement of additional infrastructure investments of more than $2bn in China. The Nifty added 88 points to close 1.7% up on the week at 5,347 points. In a special trading session on Saturday, the positive momentum was sustained, with the Nifty adding a further 0.3%. Five stocks representing 25% of index market cap contributed more than 70% of the points’ movement in the index. Happily, for the first time in a long time, all five of these stocks are in the Himalayan Fund portfolio.

The southwest monsoon continues to make good progress, as rains intensify into September, extending the traditional season, while weather system disturbances in the Arabian Sea have displaced the expected onset of the El Nino phenomenon. The forecast outcome is that rains will continue longer than usual, delivering overall precipitation of 96% of the long-term average: this is the lower end of the “normal” range. The outcome underpins the prospects for sustained rural consumer demand which has been an increasing driver of GDP growth over the past three years.

In business news, the focus is shifting to India’s public sector undertakings, who are sitting on aggregate cash reserves of more than $10bn; the government is about to liberalize the investment conditions applying to these balances, so that they can be invested in treasury securities and equity mutual funds. In addition, Finance Minister Chidambaram has convened a meeting of the CEOs of prospective disinvestment candidates. No PSUs have been privatized yet this year but that may change. A recovery in market momentum on the back of expected decisive policy action expected this month should deliver supportive market conditions for the government to generate a contribution to the fiscal balance from this source. That, in turn, may lead to monetary easing by the Reserve Bank of India, who have made fiscal consolidation a prerequisite for any policy action.

Himalayan Fund's full Weekly Market Commentary is available on the website.


31 Aug 2012

Monsoon picks up as GDP growth beats expectations

Speech by Fed Chairman comes too late to resue the week but India’s monsoon has picked up significantly.

Global markets spent most of this week in the red, as markets awaited word that supportive action was coming. Finally, on Friday, after India had closed, markets reacted positively to FED chairman Bernanke’s Jackson Hole speech and started buying equities. This left Indian markets sharply down for the week as the Nifty surrendered 128 points to close 2.4% down at 5,259.

This week the monsoon improved sharply to a touch under 100% of the long-term average. Reservoir levels have now risen above the ten-year average. The sudden improvement has even confounded the meteorological department forecasts and augurs well for sustained growth in rural consumer demand, which for the first time since economic reforms began, has been growing faster that in urban areas.

First quarter GDP growth was 5.5%, higher than consensus expectations of 5.2%. Agriculture grew by 2.9% and industry by 3.6% compared to the previous quarter but growth in services slowed by 1% to 6.9%. In individual sectors, construction was the strongest, up 10.9%, the fastest rate in nearly four years. Sustained resilience in financial services meant the overall growth in services only slowed by 2% to 6.9%. Industrial growth is now forecast at 5.1% for FY13, higher than last year but still below the seven-year average.

The vaunted new Direct Tax Code has been called in by the Finance Minister for a complete re-working, which will probably delay implementation beyond the target date of April 2013. The President of the Confederation of Indian Industry has said that the proposed GST (Goods and Services Tax), also scheduled for implementation in April 2013, will add 1.5% to GDP.

Meanwhile investors in India will be looking to the Finance Minister to be as good as his word on decisive economic action starting around the middle of September.

Himalayan Fund's full Weekly Market Commentary is available on the website.


24 Aug 2012

Monsoon: not as bad as feared

Although this year’s monsoon will not be as bad as was feared initially, its inflationalry pressure and increased spending on subsidies will make it harder for the Finance Minister to balance the Indian budget.

Last week was another four-day week as India marked the festival of Eid. Global markets were weak on three key data points: China’s PMI dropped from 49.3 to 47.8, signaling a slowdown in manufacturing; Japan’s trade deficit jumped as shipments to Europe fell and oil imports rose and then the US labour market failed to sustain its recent momentum. Markets generally were on the retreat, yet India managed to eke out a small advance: the Nifty added 21 points to close 0.4% higher at 5,387 after trading in range of 1.5%.

The latest monsoon report suggests that this year’s outcome will not be as bad as feared. Late rains are replenishing reservoirs, so that capacity is now running at the long-term average, which is good for the rabi (late) crop planting in the autumn. The progress of the monsoon in delivering rain to India’s agricultural regions is important for at least three key reasons. First, the volume of the kharif (early) harvest has a strong bearing on rural expenditure, which has underpinned overall consumer demand as the key driver of the economy over the past two years. Second, widespread drought would put added pressure on subsidized food programmes and the rural employment guarantee scheme, increasing pressure on the fiscal deficit. And finally, deficient crop sowing and low yields add to inflationary pressures in the food supply chain. Faced with an already slowing economy, these are additional pressures the government would prefer to avoid. This year’s monsoon will likely result in zero growth in the agricultural sector. Agriculture contributes about 17% to overall GDP and annual growth of 2-3% is typical but the proportion of the population affected is more like 50-60%.

There appear to be some tensions between the Finance Minister and the RBI, as arguments proceed about fiscal consolidation and monetary policy. The Finance Minister would clearly like to see a quick cut in policy rates but has to wrestle with the fiscal deficit and reach agreement on a trade-off. Cutting subsidies in a weak monsoon year will not be easy so we may only see some gestures. More likely will be a big sell-off of state owned assets, including the 2G spectrum auction.

The Q1 results season closed with earnings estimates for the full year settling in the 10-12% range, a prospective target in a settled market. That will depend on the policy action we are now promised in September: restoring sentiment and stimulating growth.

Himalayan Fund's full Weekly Market Commentary is available on the website.


23 Aug 2012

July Monthly Report: Himalayan Fund Outperforms Benchmark

July saw global equity markets sustain June’s recovery as optimism on a Eurozone solution lit the path into the summer doldrums. The MSCI World index added 1.25% in the month with Asian markets the higher contributors, by and large. In India, a political transition and poor seasonal rains clouded the outlook so the Nifty lost just under 1% for the month; the Rupee strengthened slightly, so for dollar investors, the outcome was minus 0.3%.

Portfolio performance

Himalayan Fund’s NAV per share fell by less than 0.1% in July, thus out-performing our benchmark index by 0.2%. Sixteen holdings, representing just over 50% of the portfolio outperformed the benchmark, the largest contributors being Balkrishna Industries (16.8%), Cadila Healthcare (15.9%), Magma Fincorp (15.4%) and EID Parry (12.5%). On the downside, Jindal Steel & Power (-14.9%), Bharat Electronics (-13%), Infosys (-11.4% and Bank of Baroda(-10.1%) were the heavyweight losers. Exide Industries (-5.3%) and Tata Steel (-4.4%) also lost ground. A number of portfolio changes make sectoral comparisons difficult this month: weak global steel demand is a threat to Tata Steel, so we exited, holding JSPL by preference because of its 50% merchant power interest. Crompton Greaves’s recovery looks like taking too long and we are concerned about the asset quality of HDFC’s developer loan portfolio, so we sold these positions. We sold EID Parry as it exceeded our price target rather suddenly. Also, we trimmed Infosys, Reliance Industries and ONGC to reduce concentrations. We rebalanced the portfolio towards consumer interests by initiating a position in Torrent Pharmaceuticals.


Government action is the key to the next phase in the Indian markets. Pranab Mukherjee has been elected President and has been replaced as Finance Minister by P. Chidambaram , a previous incumbent identified with periods of strong growth and important reforms. He underlined his reputation for decisiveness by promising clear policy path to fiscal consolidation. He also intends to restore foreign investor sentiment by clarifying tax concerns and implementing key reforms. He intends to arrest the slowdown in growth with the help of important policy actions within weeks. In response to this background, the market has stabilized and the downside looks limited through September. The direction and scope of policy action looks like embracing limited cuts in the subsidy burden combined with accelerated non-revenue action, including state company sell-offs and telecom spectrum auctions to limit the expansion of the fiscal deficit. Also, elimination of bureaucratic obstructions in the public sector investment programme will help to re-ignite private sector investment. Expectations may be high but an improving monsoon outlook may bring earlier relief in monetary policy. A market rally through the end of the year may be in prospect.

17 Aug 2012

Government Springs Into Action

In his Independence Day address, PM Manmohan Singh promises “major decisions” in the next three weeks. 

We continue to drift through the August doldrums, with most markets resisting any strong movement this week, except for Japan, in the black and China in the red. India had a four-day week, interrupted by Independence Day and the Nifty added 46 points to close 0.9% up at 5,366.

In his Independence Day address, on August 15, Prime Minister Manmohan Singh projected GDP growth in the current year to be a little higher than the 6.5% achieved last year. Over the following two days, Finance Minister Chidambaram and Industry Minister Sharma continued the flow of encouraging announcements, prefacing “major decisions” in the next three weeks to boost investment and revive growth. The focus of attention seems to be the cost of credit, weakness in investment and issues relating to foreign direct investment.

In a move intended to stimulate higher participation, the government has decided to allow foreign companies to bid on their own without a domestic partner in the forthcoming 2G spectrum auctions. The regulatory uncertainty surrounding the mobile telecom sector has led to a slowdown in new GSM subscriber numbers but a cut in 3G tariffs by up to 70% brought an increase of 78% in data consumption or usage of highend services, according to Nokia Siemens Networks.

The next market move depends on the central government now and expectations are high; the RBI will cooperate with any move towards fiscal consolidation and an improvement in the monsoon’s progress may make the decision-making a bit easier. The projected shortfall in the seasonal rains now looks to be falling towards 10% and reservoir capacity has risen to the long-term average.

Himalayan Fund's full Weekly Market Commentary is available on the website.


13 Aug 2012

Mr. Chidambaram Hits The Ground Running

Market sentiment in India was boosted by a whirlwind of activity accompanying the return of Mr. Chidambaram as Finance Minister.

In his first full week, ending August 10, the Nifty added 104 points to close 2% higher at 5,320 points. Average daily trading volumes were boosted by foreign investors, who bought a net $510 million in cash equity.

After having required his ministry staff to work his first weekend back on the job, Mr. Chidambaram gave a hyperactive impression with his first press conference on Monday, August 6. He promised action to get economic policy moving in support of renewed growth, review threats of vicious retroactive taxes on foreign investment, mobilize reform of FDI rules where necessary and revive public sector infrastructure projects by facilitating bureaucratic approval procedures. Most important, he also promised an early meeting with the governor of the Reserve Bank of India to discuss coordination of economic policies and, in particular creating conditions in which investment can be boosted from 33% of GDP back up to 38%.

In June, the Index of Industrial Production (IIP) contracted by 1.8%, in sharp contrast to the comparable period the previous year when it grew by 9.5%. The major reasons were a 3.3% contraction in manufacturing, at least partially due to depressed export demand. The trade body FICCI expects manufacturing activity to remain soft in the second quarter as only 31% of respondents to its survey reported higher order books for the quarter.

The government has applied to the Supreme Court for an extension to the August 31 deadline for re-auctioning cancelled spectrum from the 2G allocation process. This process is likely to be protracted, as mobile operators are also taking legal action against the government’s proposed terms and timetable. The whole process is now likely to be spun out in court, with little likelihood of a resolution before November.

Himalayan Fund's full Weekly Market Commentary is available on the website.

6 Aug 2012

Action Man!

From the Investment Advisor to Himalayan Fund NV

Is new Finance Minister Chidambaram starting as he means to continue?

The new FM ordered officers of the ministry to report for work over the weekend which generated a surge of rumours about what they might be up to on Monday. On FDI reform, they may be preparing subtle changes to regulatory definitions to facilitate IKEA's plans for launching a major investment in India.

In order to support privatizations and thus generate non-tax revenues to offset the fiscal deficit, the rules governing equity holdings by Life Insurance Corp of India (LIC) may be eased. LIC has been used as a privatization vehicle in the past when markets were choppy.

He also announced his intention to outline a path to fiscal consolidation with the help of an expert panel soon:

And today he met with the Governor of the Reserve Bank of India to discuss the state of the economy:

Can he maintain this hyperactive pace? He certainly has a decisive and market-friendly reputation and today the market reacted positively to the rumour-mill!

Mid-September looks like a defining moment.

Iceman Capital Advisors Ltd.

3 Aug 2012

New Twist to 2G Auction As Civil Servants Ordered To Work Weekends

Mr. Chidambaram has a notable start as Finance Minister and there's a new twist in India's controversial telecoms auction.

Once again, the Eurozone dominated market sentiment, as markets at initially basked in high-level commitment to support the Euro. Then the irresistible force met the immovable object of German intransigence at the ECB board; Mr. Draghi made an indecisive statement to the press afterwards and sent stock markets reeling in disappointment. India bobbed along quite nicely for most of the week and added 116 points, to close 2.3% up at 5216.

The government has prepared contingency plans for districts where monsoon rains have been poor. Rainfall improved to closer to normal last week, but it is now accepted that this monsoon will be weak. As a result, the government has huge stocks of cereals from previous plentiful monsoons to manage supplies and prices.

After the election of Pranab Mukherjee as President of India, P. Chidambaram has returned as Minister of Finance this week, after previously holding the post from 2004 – 2008. Mr. Chidambaram has a reputation for being decisive and has previously presided over notable reforms. Arriving in the office on Friday, he ordered all officers above a certain rank to report for work at the weekend! To keep up the appearance of action, the government assured the State of Maharashtra that it would expedite the sanctioning of clearances for the proposed Navi Mumbai airport, adjacent to the country’s financial centre. Also, the Prime Minister has intervened personally to remove a ban on transfer of government land for infrastructure projects that are developed in partnership with the private sector.

This month will also see further action on India’s controversial 2G auction process. After the Supreme Court cancelled 122 2G licences in February, it ordered a new auction to be completed before August 31st. The government is now going to approach the Supreme Court to seek an extension to this deadline. Meanwhile the oversight panel has recommended a floor price for the licenses of approximately $2.6bn for an allocation 5 Mhz of GSM spectrum across the whole country. This is about 23% lower than the figure suggested by the more hawkish Telecom Regulatory Authority of India but a new twist is a spectrum fee of 3-8% of revenue for each license. One thing is becoming clear: the cost of mobile telephony in this market of nearly 900 million subscribers is about to get higher.

Himalayan Fund's full Weekly Market Commentary is available on the website.


31 Jul 2012

Himalayan Fund up 6.2% in June

Global equity markets recovered their composure in June as an optimistic mood drove the MSCI World Index to a gain of 4.75%. India joined the party, with the Nifty adding 7.2% for the month in dollar terms, with the currency holding steady.

Portfolio performance

Himalayan Fund rose by 6.2% in June, thus under-performing our benchmark index by 1%. Our portfolio out-performed sectoral indices in Energy, Financials, IT, Metals and Construction but underperformed in Autos and Consumer Goods and we remain absent from the Real Estate and Cement sectors. Nine stocks representing 35.7% of the portfolio outperformed, the most spectacular being Indraprashtha Gas (+22%), which substantially clawed back previous losses on the strength of a favourable High Court judgment against a tariff ruling.

The Fund made no changes to the portfolio during the month.


Concern about the absence of a policy reaction to a broad global economic slowdown is dominating markets this summer.

The Eurozone continues to fail to resolve the problem of stimulating some growth somewhere, not to mention saving the Euro. The US is barely growing and certainly not enough to create jobs in significant numbers, in spite of the fact that major corporations are piling up earnings.

In India, corporate earnings look to have bottomed out, so upward revisions may follow the current reporting season. Meanwhile, the outlook for policy action may be improving and providing a floor under the market during the monsoon parliamentary session. Major reforms look like being finessed and a prime ministerial panel on the introduction of anti tax-avoidance rules is likely to propose terms friendly to foreign investors.

The monsoon itself is weak so far and could end up below average; this may pose an inflation risk and delay further monetary easing. It is worth remembering, however, that in the last two comparably weak monsoons, 2002 and 2009, the Nifty gained 4% and 84% respectively. For the moment, the outlook through the end of the year looks optimistic, on balance.

23 Jul 2012

New President, New Reforms?

The election of Pranab Mukherjee as India’s 13th President increases the prospect of necessary reforms.

The IMF produced a pessimistic revision of its global GDP outlook, cutting its forecast for the current year to 3.5%, the slowest since 2009. The forecast is subject to warnings that it could be worse if the US does nothing about its so-called “fiscal cliff” and the Eurozone fails to move decisively towards a robust monetary union. The IMF downgrade included India, which is forecast at 6.1% in 2012, down from 6.8%.

India’s Wholesale Price Index eased to a five month low of 7.25% in June, against expectations of nearly 7.6%. Retail Price Inflation (RPI) declined to just 10% in June as a base effect in housing prices contributed. The WPI number is still well outside the RBI’s comfort zone, delaying the prospect of any further monetary easing.

State and federal parliamentarians have duly elected Pranab Mukherjee to the ceremonial post of President of India. Apart from ceremony, there are two areas in which a president can have an effect: he gets to choose who to invite to form a government, a potentially crucial move in a tight outcome. He can also be instrumental in forging compromise in policy disputes between the centre and the states. Both of these roles could be important as the centre tries to implement important reforms. His election now opens the door to a cabinet re-shuffle which would give Manmohan Singh a last opportunity to reprise his early nineties reform record, revive investor sentiment and initiate a recovery in the markets.

The likelihood of some positive action is good, which suggests that this is not the time to exit this market.


13 Jul 2012

Positive business results and a good monsoon

This was mostly a week of red ink for the markets, dominated by Eurozone bad news again. Moody’s cut Italy’s sovereign rating from A3 to Baa2 just as the OECD forecast that Germany was the only Eurozone country which would cut unemployment before the end of 2013. China’s GDP growth was in line with expectations in the second quarter so markets got a lift on Friday. The Nifty gave up 90 points on the week, closing 1.7% down at 5227 after trading in a range of 2.5%. Daily trading volumes settled back to $2.1bn again, although FIIs were again net buyers, of $218mil, bringing their monthly total to $658mil for July. Five stocks representing 17% of market cap cost the index 64% of the overall loss. Advancing stocks were outnumbered nearly three to one. Yet volatility remained pretty flat: the India VIX opened and closed at 18.

The first quarter results started, with HDFC delivering another gold-plated performance: both revenue and profit up 19%. Then the bellwether, Infosys, came with 28.5% more revenue and 33% more profits but cut its guidance and is reluctant to guide anymore. Collapse of fat lady! The stock was slashed by up to 10% on the day. TCS announced the following day, sooner than previously but delivered 32% more revenue, 32% more profits and a more optimistic outlook, so the stock was chased up in a down market. Finally, our other gold-plated financial, HDFC Bank reported net interest income up by 22.3% and profits ahead by 31%.

Rumours abound about plans to re-shuffle the cabinet after the Presidential election on July 19th and the Vice-presidential election a couple of weeks later. Meanwhile, the PM has warned his colleagues in public of the risk of India’s sovereign rating being downgraded if they don’t act on fiscal consolidation and economic reform with a very few weeks. Meanwhile, the monsoon has improved, with above normal rainfall in the latest week cutting the cumulative deficit to 22%. The market is ready for a boost and it seems increasingly likely that the politicians will help this summer.

Himalayan Fund's full Weekly Market Commentary is available on the website.


6 Jul 2012

Gold and Oil Prices Key to Current Account Deficit

Indian markets, and the Rupee, are holding steady in the face of this month’s presidential elections.
Last week saw further action by central banks in China, Europe and the UK, and poor job creation numbers from the US. Indian markets put up a fair show and managed to close the week in the black. The Nifty closed 38 points up at 5317 points, for a gain of 0.7%.
The Rupee held on to its gains from last week, even as the trade figures for 2012 showed a record trade deficit. The deficit was mainly caused by imports of oil and precious metals. Steady earnings in the software industry did help to dampen the deficit. The key for this year’s current account deficit, and by extension the rate of the Rupee, is the collapse in gold imports after the government amended import duties and the decline in the oil price.
This year’s monsoon continues to stutter, with rains currently 30% below normal. The rains are spreading, however, and have reached the upper parts of the west coast this week. Water reservoir levels are still behind expectations at this early stage, and are starting to affect hydro-electric generating capacity.
Indian companies will start to release their first quarter results in the coming weeks, but the event everyone is really looking forward to, is the presidential elections later this month. The elections are expected to usher in a new phase of reform driven by Prime Minister Manmohan Singh, who has taken over at the wheel of the Finance Ministry. He is expected to reduce diesel fuel subsidies, which are weighing heavily on the budget, and to boost investment sentiment by acting decisively on the long-stalled foreign investment rules and even the dreaded anti tax-avoidance rules (GAAR). Any combination of results should sustain the exchange rate  and generate better market momentum.
Himalayan Fund's full Weekly Market Commentary is available on the website.

25 Jun 2012

Is the growth story intact?

Policy paralysis is the main obstacle to further economic growth in India. But India is still the second fastest growing major economy in the world and a return to 9%+ economic growth is not out of the question.

A seminar titled "India: Is the growth story intact?" was held at the Greenwood Theatre in London on 19 June 2012. The panel of speakers consisted of: Lord Desai, Jitesh Gadhia, Senior Managing Director - Blackstone, Mark Lewis , Co-Chair India Group - BLP, Ian McEvatt , Chairman - Himalayan Fund NV and Steven O'Hanlon, Chief Investment Officer - Fixed Income, ACPI.

  • The India economic growth story is impaired - not intact anymore, but not dead either. Politics and policy paralysis are the main causes. India is known for taking three steps forward and two steps back. You should not write off India in the middle of the two steps back. India is still the second fastest growing major economy in the world.
  • The drivers to achieving India's economic potential include: a mature democracy, an established institutional framework, demographics, entrepreneurial spirit, a growing educated middle class and a judicial system which, although it is very slow,has also passed judgements in favour of foreign investors.
  • The risks to achieving India's economic potential include: politics, corruption, lack of consensus among coalition partners for reforms, poor infrastructure, inadequate education and skilling, lack of a developed bond market to help finance infrastructure growth. The recent proposals on retrospective tax and the "Vodafone case" have damaged foreign investor sentiment and limited their appetite for what was once a very attractive investment destination.
  • The outlook for markets in next twelve months: positive for equity and bond markets. Private equity investments into India are viewed on more than a twelve month horizon and the appetite remains for selective investments.
  • The stock market is far more open to foreign investors than Foreign Direct Investments which are subject to sector caps. Politics severely limits the opening up of key sectors. Bureaucracy and red tape need to be reduced substantially to make India a more attractive destination.
  • Politics, scandals and poor governance were mentioned throughout the seminar by the panellists. There was a need to de-link politics from economic decisions. In reality this is impossible, and limits India's economic potential.
  • Overall, the impairment in India's economic growth was seen as being short-term. But, many "speed bumps" lie on the journey ahead to returning to 9%+ growth. Politics, corruption, excessive bureaucracy, poor infrastructure and inadequate education and skilling are among challenges that limit India from realising its economic potential. The size of the market is compelling, especially at a time of weakness in developed markets.

22 Jun 2012

Indian political parties: unpopular and badly managed

Indian politics is suffering a comparable policy freeze to Europe and the United States. The central bank is unable to take up the slack.

The monsoon made good progress this week, with rainfall improving to 75% of the long-term average. Reservoir levels are behind last year’s record level but still ahead of the ten-year average. Some crop sowing is already ahead of last year. Any improvement will be well-received at the RBI, the central bank, where inflation concerns are at the top of the agenda. With many Indians spending up to half of their disposable income on food, an abundant harvest is crucial in reducing price pressure.

The slow start to the monsoon season was one reason for the RBI to hold interest rates unchanged at its June mid-term review last week. Another reason was its disappointment that the bank’s previous interest rate cuts failed to encourage the government to move on fiscal consolidation. The RBI states that high interest rates are less a factor in slowing investment than the absence of government policy action and reform.

This brings us to the central issue in the Indian economy: Indian politics is suffering a comparable policy freeze to Europe and the United States. Both national parties, Congress and BJP, are unpopular and badly organized. Regional parties are attracting increasing support, raising the prospect of a disparate coalition emerging from the next national elections in 2014.

A new political impetus is required and the election of a new President next month may provide just that. Polls suggest the current Finance Minister, Pranab Mukherjee, of the Congress Party, will win. This would present the Prime Minister, Manmohan Singh, with an opportunity to re-shuffle his cabinet, perhaps taking back the Finance portfolio himself in a late attempt to restore his reputation for reform.

Himalayan Fund's full Weekly Market Commentary is available on the website.


18 Jun 2012

Inflation risk triggers surprise RBI decision

The Reserve Bank of India today surprised markets by holding the key repo rate stable at 8%.
With core inflation remaining just below 5%, global commodity prices subdued and the Rupee stabilizing, the RBI was widely expected to announce further monetary easing. Analists expected a cut of 25 basis points.

In the event, the RBI went against market expectations with a hold on monetary policy. The big excuses were failure of the Indian government to follow-through with fiscal consolidation, sustained inflation risk and a hopeless external situation as international governments fail to grasp the nettle of economic crisis.

Expert views on the decision can be found here.

Meanwhile, Indian politics is in a stalemate which is unliely to be broken before the Presidential election on July 19th. The elections may offer an opportunity for a cabinet re-shuffle to stimulate policy action.

Even in the face of global downturn, India can still generate 60-70% of GDP from domestic demand. That means that to maintain growth in the 5%+ range, India Inc. just needs to keep operating. Corporate earnings growth of 10-12% should be a floor for well-managed companies. Policy uncertainties are holding the private sector back, so we need to see movement in New Delhi and Prime Minister Singh has re-iterated commitment to public sector investment.

15 Jun 2012

Monsoon season

It’s the monsoon season in India. Rains are is crucial for Indian price levels. Bad rains mean bad harvests, resulting in higher prices. And since the average Indian spends up to half his disposable income on food, an abundant harvest is crucial in reducing price pressure.

The rains have started a little slowly: rainfall over the first two weeks has been weaker than hoped for and so far has concentrated in coastal areas. There is concern that an El Nino effect may interrupt rainfall volume later in the season, but for now, forecasts remain optimistic. Meanwhile, the government has announced a substantial increase in minimum support prices for key crops. This may affect inflation figures later in the year.

1 Jun 2012

Wanted: catalyst for market momentum

The Eurozone continues to undermine investor sentiment everywhere; this week it was Spain which looks like having to bail out its banks, which the zone might not be able to afford. The week started out well in India, with the Nifty creeping up in the first couple of days but ended up closing 1.6% down at 4,842 points.

The Finance Minister has instructed state-owned banks to ensure that every household has at least one savings account by the end of June, in preparation for direct transfer of benefits under the financial inclusion plan. We think Mr. Mukherjee may be polishing his marbles in the hope of being elected president in the next session of parliament.

The new National Telecoms Policy has been approved: this will do away with domestic roaming charges, introduce a new pan-India license and allow operators to share and trade spectrum; all eventually favouring the major operators, especially Bharti, still the market leader.

The week ended with weak news on the economy. GDP growth slowed in Q4 of fiscal year 2012 to 5.3%. The slowdown is not quite as bad as it appears, being partly due to a base effect caused by the revision of growth in Q4 of fiscal year 2011 from 7.8% to 9.2%. The fiscal deficit for FY12 came out at 5.7%, a bit lower than the revised forecast of 5.9%.

The rate of quarterly profits growth appears still to be slowing. The overall market valuation is at the bottom end of the historic range but we still need a catalyst for a return of market momentum. The weak GDP number may provide that now by moving the RBI to further easing with a view to reviving private investment. Their next meeting follows the next Greek election.

Himalayan Fund's full Weekly Market Commentary is available on the website.


A Different Explanation for the Rupee Decline

An Indian vastu expert has come up with an unusual explanation for the decline of the Indian rupee over the past two years: apparently it’s all to do with the new symbol of the rupee.

In the past twelve months, the rupee has declined nearly 20% against the dollar. According to vastu consultant Rajkumar Jhanjhari, the slide has been caused by the introduction of the new rupee symbol in 2010.

The rupee symbol is a combination of the Devanagari "?" (ra) and the Latin R without its vertical bar. According to its designer, the two parallel lines at the top represent the three colours of the Indian flag and depict an equality sign symbolising the nation's desire to reduce economic disparity.

However, according to Mr. Jhanjhari, the lower horizontal line of the symbol has “slit the throat” of the Indian rupee, leading to its slide. “One must ask why our growth rate is taking a beating now before rubbishing pleas for changing the symbol," Mr. Jhanjhari says.

He may be on to something.

25 May 2012

Where is the political leadership when you need it?

The G8 summit brought some comforting words about solving the global economic crisis but the Eurozone leaders then convened for a six-hour dinner and proceeded to kick the can down the road again! A month of tub-thumping before another Greek election and investors will be getting the vapours over Grexit or not.

Meanwhile India eked out a positive week with the Nifty adding 29 points to close 0.6% to the good.

The Budget session of parliament came to an end with several financial bills still on the table. What was approved, was a 12% increase in the pump price of petrol for state owned petrol retailers. The price of petrol is effectively deregulated now, and the price of diesel surely should be next. However, some priority sectors, like agriculture, continue to demand subsidies on diesel, while urban motorists are making hay with the subsidized price. The government could address this by selling duty-free dyed diesel for priority sectors and fully-loaded un-dyed diesel to urban drivers. It’s simple enough, and the fines for unlawful use of dyed diesel would help with the fiscal deficit!

Meanwhile, a Euro-Indian airline crisis may be in the making. India’s aviation minister came out in support of Indian airlines which are refusing to provide data to the EU to comply with the EU’s carbon tax requirements. If this brings sanctions against Indian airlines, the minister will bar European airlines from Indian airports.

The market is at the lower end of its historic valuation range now, but the catalyst for another surge in momentum is missing, at global and local levels. A lower price of oil and falling demand for gold should benefit the Indian balance of payments, but where is the political leadership when you need it?

Himalayan Fund's full Weekly Market Commentary is available on the website.


18 May 2012

Cheap oil to the rescue?

The Greek crisis set market nerves on edge and most main markets were in the red by between 2 and 10%. India bucked the trend a bit, with the Nifty closing 0.8% down at 4,891 points. Tata Motors alone cost the index 21 points as it disclosed flat April sales after months of sharp increases.

MSCI made adjustments to India’s weighting in the Emerging Markets index and caused some market turmoil in the process. In the end, the Indian weighting was cut by just 0.1% as three stocks were added and one removed.

Wholesale price inflation (WPI) rose from 6.7% to 7.2% in April, mostly driven by a spike in food prices. February’s number was revised upwards by 0.4%. The more stable core inflation number advance only slightly from 4.7% to 4.9%. These numbers will narrow any scope for further monetary easing in the short term but an expected good monsoon and further loosening of supply constraints will help later in the year.

The Rupee has been under intense pressure recently due to concerns about India’s current account deficit. The most worrying component has been the price of oil and expectations for it being sustained in the $110-120 per barrel range.

The price of West Texas crude has dropped into the $90s due to higher stock levels in the US and weaker than expected demand in China. Economic weakness in the Eurozone may further weaken demand conditions, allowing the price of crude to fall more. This may be the way the world economy will get lucky again: stimulated by cheaper energy!

Himalayan Fund's full Weekly Market Commentary is available on the website.


14 May 2012

Nifty Down On Global Sentiment

A lurch to the left in elections in France and Greece had markets on edge this week and then an extraordinarily embarrassing trading loss at J.P. Morgan caused a surge in risk aversion on Friday. No amount of good news from India could offset this, so the Nifty shed 158 points to close 3.1% down at 4,929 points.

Bosch India was the star of the week, with sales up 9% and profits 22% ahead. Housing Development Finance Corp again produced excellent numbers: Net Interest Income (NII) ahead by 32% and profits up by over 16%. HDFC is raising a $80mil 18-month note by private placement at an interest rate of 9.75%. Cadila Healthcare had sales growth of 15.2% but profits declined by 4.5% due to higher interest costs and a higher tax charge.

Reliance Industries has raised a $2bn syndicated loan facility with a thirteen year maturity and a guarantee from Hermes, the German export credit agency, to finance purchases from German suppliers in connection with capacity expansion at four of its petrochemical plants.

In its efforts to boost India’s foreign reserves, the RBI has increased the ceiling on interest rates which may be paid on NRI deposits, by 3% for deposits of three to five years and 2% for up to three years’ maturity. In another similar move, it has instructed exporters to convert 50% of foreign exchange balances to Rupees within two weeks, a move which is expected to add 43.5bn to reserves. The central bank will execute another $2.5bn in open market operations to inject liquidity into the money markets. The March Index of Industrial Production surprised everyone on the downside: contracting by 3.5% despite growth in the Purchasing Managers’ Index. The ostensible reason was another big negative swing in capital goods production.

Feeling the pressure of market reaction, the Finance Minister made a major speech on the application of General Anti-Avoidance Rules (GAAR). Implementation has been postponed by a year and there will be no general application of retrospective taxes. The Minister also cut the capital gains tax on private equity investments from 20 to 10%.

Himalayan Fund's full Weekly Market Commentary is available on the website.


11 May 2012

Infosys and Indraprashta dent April performance

The MSCI World index lost 1.4% in April. There were a few exceptions, including China and the UK, but India was with the majority, as the Nifty gave up 4.2% in USD terms. The market remained concerned about the current account deficit, which cost the Rupee another 1.8% in depreciation.

Himalayan Fund’s NAV per share fell by 7.5% in April, thus under-performing our benchmark index by 3.3%. Two stocks were substantially responsible for the underperformance. Infosys reported excellent profits but their guidance for the next quarter was very weak so the stock was marked down by 15.2% on the month. Indraprashtha Gas was hit by a regulatory tariff reduction order which caused a net loss of 13.3% on the month. The combined weight of these two holdings more than offset good returns on some non-index holdings. The top performing stock in the portfolio in April was Balkrishna Industries, with a gain of 6.4%. Tata Consultancy Services added 4.2% after its results outshone Infosys. Pidilite Industries added 3.9%, Bosch India gained 2.2% and HDFC gained 1.9%.

There were a few changes to the Nifty composition. Reliance Power (Energy) and Reliance Communications (Telecom) were removed from the index and Asian Paints (Consumer Goods) and Bank of Baroda (Financials) were added.

Himalayan Fund made no changes in the portfolio during the month.

The first step in monetary easing has come and gone and the fourth quarter results season is well advanced. Manufacturing performance clearly needs some stimulation but the greatest concern must be the political stalemate and the gratuitous obstruction of reform efforts by regional parties.

Meanwhile, following strong inflows of portfolio investment in the early part of the year, recurring evidence of a feeble global recovery is undermining risk appetites. Continued ineffectiveness of Eurozone politicians in resolving the Euro crisis will continue to dampen markets.

7 May 2012

Indian Trade Deficit To Record High

Indian markets closed a shortened week in the red, the Nifty down 2% at 5,087 points, due mainly to weaker than expected US economic data and mixed quarterly results of Indian companies.

Positive exceptions were Jindal Steel & Power, which reported sales ahead by 42% and profits by 16.5%, and Titan Industries. The watch manufacturer reported an excellent quarter, with sales up by 31% and profits by 72%.

In macro-economic news, merchandise exports fell 5.7% in March, as orders from Europe started to suffer from a fall-off in demand. Nonetheless, the government just managed to see its export target of $300bn for FY12 exceeded, an increase of 21% for the year. The trade gap reached a record of almost $130bn as energy costs weighed on the balance of payments.

To some surprise in the market, legislation covering cable TV digitization and pricing was passed and generally well-received. There are 150mil pay TV homes which will be affected; the new regime and pricing will come into effect on July first.

The RBI continued on its merry independent way, issuing Basel III guidelines for Indian banks which are about 1% tighter than required. Implementation has been delayed by about six months, to March 2015 for the capital conservation buffer and March 2018 for the Tier-1 guideline. Finally, in a boost to Indian producers, the cap on sugar exports has been lifted and sugar has been added to the open general license category, along with wheat and rice.

Himalayan Fund's full Weekly Market Commentary is available on the website.


27 Apr 2012

FII Window Created To Keep Interest Rates Down

The Indian market continued to sag along with the rest of global stock markets. The Nifty closed the week down 1.9% at 5191 points. Trading volumes have been decidedly modest for the past few weeks.

Trying not to look like it might backpedal on some of the more draconian budget announcements, the government’s Chief Economic Adviser Kaushik Basu predicted that important economic reforms on subsidies and FDI in retail would emerge within six months. Already the Finance Minister is planning to move the Banking Bill into parliament in the session just started. He has asked the RBI to create a $10bn window for FIIs to invest in domestic corporate bonds in the hope that the high yields will draw external demand to keep downward pressure on interest rates. The Finance Minister is also planning to cut the tax burden on private equity transactions. It has also emerged that the government has agreed in principle to deregulate diesel fuel but not cooking gas.

Standard & Poors has adjusted India’s ratings outlook from “stable” to “negative” based on concerns about slowing growth and the rising trade deficit. This means that India’s debt investment grade has a 30% likelihood of a downgrade within two years. This is a medium-term view and is no basis for the resulting instinctive mark-down of the banking sector, including the best-managed, such as HDFC Bank. Fortunately, the good ones were clawing their way back by the end of the week.

Himalayan Fund's full Weekly Market Commentary is available on the website.


23 Apr 2012

UBS’s preference for China driven by short-term trading considerations

UBS, the investment bank, on Friday downgraded Indian shares to "neutral" from "overweight," saying China is the better bet. The investment bank said India was unlikely to see big downside surprises on inflation, and hence no aggressive rate cuts.

By contrast, China, the bank's biggest overweight market, offers an opportunity to benefit from expected policy easing, a more stable economy, and more attractive valuations.

"We continue to think the best theme in the region is to be tilted towards policy easing. Our preference here is now China rather than India," said UBS in the report.

We think India and China are not really comparable in that way.

India has a longer history of stock market regulation, democratic institutions, an independent common law jurisdiction as well as a highly transparent monetary policy process. In India, the Central Bank holds an analyst conference call after monetary policy meetings and shows its hand quite clearly to the markets. In China the whole thing is opaque: you can’t see what’s going on or get a clear statement of intent. When it comes to predicting monetary policy moves, in India, you can tell now that there won’t be much more of substance for a while, in China your guess is as good as UBS’s.

In addition, despite the dubious efforts of a weakened government in a fractious national parliament, the fundamental growth story remains intact in the medium term. China is more advanced in development terms, in a way which risks throwing up competitive obstacles such as structurally higher labour costs in the foreseeable future. The argument for choosing one over the other can only be driven by short-term trading considerations, which is not a sound basis for emerging markets investing. The return prospects in India remain attractive in the medium term.


Nifty up after surprise interest-rate cut

This week, the IMF produced forecasts showing world GDP growing by 3.5% this year and 4.1% next, with emerging markets predicted to be the main drivers.

The Nifty closed the week 1.6% in the black at 5291 points, a gain of 84 points, Average daily trading volumes remained subdued. The raise was due mainly to the surprisingly aggressive interest rate cut by the RBI. The RBI’s annual review of monetary policy resulted in a cut of 50 basis points. This was the first cut after thirteen successive rates increases in three years. The overwhelming consideration was slowing economic momentum, since inflationary pressures are still evident. Recent IIP numbers showed evidence of a slight recovery in private investment and the central bank clearly hopes to encourage more with its latest action.

The current account deficit widened to 4.1% of GDP in December, largely due to fuel prices. A sustained deficit at this level may become harder to finance if capital flows to emerging markets slow. India has enjoyed sustained inflows from remittances and non-resident Indian deposits, which along with increased levels of foreign commercial borrowings by companies attracted by low interest rates and Rupee depreciation, have supported foreign reserves.

Himalayan Fund's full Weekly Market Commentary is available on the website.


21 Apr 2012

Himalayan Fund Outperforms Benchmark

March was not a good month for investors worldwide. With the exception of the US, all major markets lost ground. The Nifty lost 5.3% in dollar terms. Rupee depreciation contributed 4% of this setback as concerns about the Indian current account deficit took hold.

As a result, Himalayan Fund’s NAV per share dropped by 4.6% in March. This still is an outperformance of the benchmark index for the second month in succession, this time by 70 basis points. The fund’s performance is now also above-benchmark for the year-to-date.

The Union Budget was not the government’s greatest hour. It did little for fiscal consolidation but mercifully did not unleash a wave of populist welfare spending to offset the voter dissatisfaction evident in the state elections. Hawkish proposals for retroactive taxation of foreign investment in India drew strong protests, including threats of sharp decreases of FDI and portfolio investment.

Meanwhile, a catalyst for momentum was expected from the RBI’s annual policy review. This produced a positive surprise: a 50 basis point cut in policy rates. Evidence of a recovery in private investment emerged in the IIP figures, so we may have seen the end of the slowdown in growth momentum.

The market will be driven by company results in the next quarter.

20 Apr 2012

When Will India Overtake The West?

In this TEDIndia talk, Hans Rosling, Professor of global health at Sweden's Karolinska Institute and founder of Gapminder, tells of his surprise when he found out, as a university student, that Indian students were actually smarter than he is, and goes on to predict when Indian per capita GDP will catch up with the West.

In a related interview in IndiaTimes, Professor Rosling says that :the West and in particular the US has three fundamental problems which are far bigger than they appear:

"The first of which is the Trade Unbalance — more imports than exports something which has not changed for a while The Federal Reserve Balance sheet which has only been going down over the last decade or so and a Clear Oil Addiction. 
The west consumes far too much power for its own good. They are three primary factors in India's favour — Rich Human Resource Capital and Inequalities which unlike China and some other countries are favourable. In China, in order to develop rural China — money and goods have to travel over a 1000 km. In India though, the disparity lies only within a state and hence a smaller distance has to be traversed geographically. This is India's advantage."

How Multinationals Can Win In India: McKinsey

In a research paper under the headline “How Multinationals Can Win In India, McKinsey, the consulting firm, outlines what it thinks are the crusical elements of succeeding in India.

With the Indian economy growing an expected 6% per year in the coming years (and growth figures in some sectors even higher) multinationals cannot afford to miss out on India. “To realize India’s potential,” McKinsey write, “multinationals must show a strong and visible commitment to the country, empower their local operations, and invest in local talent."

“Winning in India requires an intense and concerted effort. The multinationals need top leaders willing to make a commitment to the Indian operation and to localize and empower it. They must adapt to the Indian consumer’s demand for innovative, low-cost delivery systems and high value for money products, as well as identify and implement an appropriate ownership model. Finally, senior executives of these companies should not neglect the management of local stakeholders, such as regulators and activists. The best efforts to localize an Indian business model will come to naught if these influential groups are overlooked.”

13 Apr 2012

IIP Index causes confusion and policy uncertainty

Easter Week saw evidence of growth slowing in China, a further slowing of Indian industrial activity and a nasty quarterly report from Infosys. No surprise then that the Nifty gave up 116 points to close 2.2% down at 5207 points.
February’s Index of Industrial Production (IIP) grew by 4.1%. On the face of it, this is a much lower number than January but then the extraordinary January number has been revised downwards from 6.8% to 1.1%. We are still waiting for a detailed explanation. In any case, the numbers put the RBI on the horns of a dilemma: global commodity prices are due to soften but the crucial oil price remains high, causing concern about the trade deficit and imported inflation. On the other hand, the very obvious slowing of industrial activity needs to be addressed, so the odds still favour monetary easing. The IIP did show slight evidence of increasing private sector investment, so the timing might prove a tonic for the markets.
The Finance Ministry is planning a road-show around five Gulf States promoting its new Qualified Foreign Investor programme, with a view to stimulating an additional $50-75bn of portfolio inflows. No doubt this is to feed the government’s plan for all profitable PSU businesses to be listed.

Himalayan Fund's full Weekly Market Commentary is available on the website.


30 Mar 2012

Himalayan Fund unaffected by proposed FII taxation

Over the past two weeks, the Nifty has moved erratically following the presentation of the Union Budget, as measures relating to taxation of foreign interests in India have been highlighted.

The threat of application of GAAR (General Anti Avoidance Rules) by the Finance Ministry has caused palpitations around the market, especially as far as Mauritius-channeled P-notes are concerned. The wording of the Finance Bill is very opaque and rumours have been circulating in the market almost daily, undermining sentiment. It also appears that investors channeling funds through passive vehicles in tax havens may be open to attack. By the end of this week, the confusion forced the Finance Minister to issue a statement that bona fide FIIs would not be at risk of retrospective taxation.

Perhaps it is worth reminding everyone that Himalayan Fund NV is a Dutch investment company with a locus of management in Amsterdam; the company is self-managed on the responsibility of the board of directors. There is no intervening “pass-through” vehicle in a tax haven and the company is registered with the Indian authorities in its own right. The fund is and always has been certified in compliance with the requirements  of the Dutch/Indian double tax treaty and we expect it to continue to be so. The application of GAAR by the Indian tax authorities should not affect Himalayan Fund in any way.

Himalayan Fund's full Weekly Market Commentary is available on the website.