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.

ICEMAN

26 Mar 2012

Himalayan Fund Outperforms Benchmark



Global markets continued to perform strongly in February, with the MSCI World Index adding more than 4%. India put in a strong performance driven by continued net inflows from foreign investors. The Nifty returned 4.3% in US dollar terms for the month.

Himalayan Fund’s NAV per share added 7.2% in February, thus out-performing our benchmark index by 2.9%.

The mid- and smallcap market segments outperformed the broad market for the first time in a long time. Balkrishna Industries was the top-performing stock in the portfolio, adding 27.7%. Magma Fincorp added 23.4% and Bharat Electronics advanced by 16.9%. Our strongest Nifty stock was TCS, which added 8.9%.

During the month, we disposed of our holding in Tata Power, anticipating that the share-price would be overshadowed by concerns about coal costs at its Mundra ultra-mega power project, coming on-line at a loss.

The governing Congress Party suffered a bloody nose in the latest state elections. This will present significant obstacles to the implementation of economic reforms. Thus the equity markets will be looking to economic policy for direction. At the centre, the most we can hope for is that the Union Budget will do no harm to the private sector.

 Against that background, the Reserve Bank will be the source of momentum as it reverses monetary policy. The RBI will probably start to gently lower its policy rates from April. This should underpin equity markets through the year.


19 Mar 2012

"A Budget for political survival": Pradip Shah


DNA, the Indian newspaper, have asked ten analists and industry specialists their views of the Union Budget. On average, the experts gave Pranap Mukherjee, the Finance Minister, a 6.2 for his Budget.
While some gave the thumbs up to Pranab Mukherjee for not going overly aggressive on the fiscal deficit target, others said the lack of bold moves was a big disappointment.
Mukherjee defended his cautious approach in the Times of India, saying that “knowing the mood of the persons who matter here (in Parliament), I had to be extra careful and I had to make my colleagues extra careful. Therefore, many of things which could have been done, rather should have been done, could not be done just at the time of the Budget.”
Among the disappointed experts was Pradip Shah, Chairman of IndAsia Fund Advisors, who thinks that “this is a Budget for political survival, with no roadmap for doing away with fuel and fertiliser  subsidies, and relies on growth from existing economic momentum. [Mukherjee’s] objective of demand driven growth is contradicted by the raft of duty hikes.”
The initial reaction of the markets to the Budget was negative with the Sensex declining 209 points while media and investor reactions ranged from lukewarm to hostile.

16 Mar 2012

Union Budget: A Non-Event


Global equity markets advanced on improving economic signals. Indian markets, however, were fully focused on the state elections’ aftermath, the RBI policy review and the Union Budget.
The Nifty closed the week 0.3% down at 5318 points. Foreign Institutional Investors returned to the market, buying a net $800mil of cash equities, shrugging off political concerns in favour of the prospect of monetary easing.
Last week saw a plethora of economic data. The January Index of Industrial Production grew by 6.8%, well ahead of market forecasts around 2%. Exports rose just 4.3% in February, due to weakening demand in Europe. Imports accelerated by 20.6%, driven by energy imports. Wholesale Price Inflation rose slightly, to 6.9%, but core inflation, of more concern for monetary policy, dropped sharply, from 6.7% to 5.75%.
The Union budget, presented on Friday, was a non-event, with Finance Minister Mukherjee obeying the first rule in a crisis situation: do no harm. In fact, the Budget did nothing; GDP growth is forecast at 7.6% in FY13, up from an expected 6.9% this year. The fiscal deficit is forecast at 5.1% in FY13. This will be achieved through a cap on a subsidy programme covering anything from diesel fuel to fertilizers and food for the poor as well as tinkering with excise duties and levies.
Further interest rate cuts by the RBI, expected on Thursday, failed to materialize. Rate cuts are more likely in April. If energy prices do not rise dramatically, a 25 basis point cut in the repo rate seems assured. This would be enough of a short-term tonic for the markets.
Himalayan Fund's full Weekly Market Commentary is available on the website.

ICEMAN

13 Mar 2012

UP state elections force RBI policy change


The big story of the week comes from Uttar Pradesh, where the outcome of the state elections were nothing short of an embarrassment for the Congress party and the Ghandi family.

The sentiment was that Congress would gain enough seats in UP to form a coalition with its local ally Samajwadi to form a state government. In the event, Samajwadi won an overall majority in its own right, marginalizing Congress, led by Rahul Ghandi, severely damaging his reputation and standing as a prospective future leader.

At a national level, the implication is for continued logjam in parliament, delaying key reforms and prompting populist spending by the government in an attempt to improve re-election prospects for 2014.

With fiscal responsibility out the window for the next two years, the Reserve Bank of India’s reaction was closely watched. Concerned about inflation, RBI’s policy of monetary tightening has reigned in inflation, but at the cost of discouraging investment. Probably reacting directly to the outcome of the state elections, RBI surprised everyone with a 75 basis point cut in the cash reserve ratio (CRR). This was partially a necessity as inter-bank liquidity was tight and the impending advance tax payments might have been disruptive but an extra 25 basis points more than expected was  almost certainly a statement of intent on monetary easing. Next week’s monetary policy review has been pre-empted, probably to put a floor under the markets in preparation for this Friday’s Union Budget.

As the Indian stock market is highly sensitive to any monetary easing, a change in RBI’s policy could well set trigger a take-off of the stock market.

With the battle-lines between government and the RBI drawn, all eyes are on RBI’s board meeting this Thursday and the federal budget this Friday.

9 Mar 2012

State Elections Set To Block Reform

Last week saw some key domestic action in Indian political economy. The Nifty lost 25 points closing 0.5% down at 5334.

The big news of the week centered on the outcome of several state elections. The results were nothing short of an embarrassment for the Congress party. The key to the outcome was Uttar Pradesh, where local ally Samajwadi won an overall majority in its own right, marginalizing Congress. At a national level, the implication is for continued logjam in parliament, delaying key reforms and prompting populist spending by the government in an attempt to improve re-election prospects for 2014.

The government courted international controversy by banning the export of cotton, despite a record domestic crop. This was to protect the competitive standing of domestic textile producers against price competition from Pakistan and Bangladesh.

Tata Steel has protested to the UK government that inflation of its energy prices due to environmental levies has made its UK electricity cost up to 50% more than in France, Germany or the Netherlands, where it also operates. This cost disadvantage could lead to a cut of up to 2,000 jobs in the UK to maintain competitiveness.

After the market closed, the RBI surprised everyone with a 75 basis point cut in the cash reserve ratio (CRR). This was partially a necessity, but an extra 25 basis points more than expected was almost certainly a statement of intent on monetary easing. Next week’s monetary policy review has been pre-empted, probably to put a floor under the markets in preparation for Friday’s Union Budget.

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

ICEMAN

5 Mar 2012

ONGC Auction Dominates Markets

Indian markets were dominated for the second week in a row by the government’s attempt to auction off 5% of ONGC, the state-owned oil and gas company. The market stood up to the sale, just, but gave up seventy points overall in the process. The Nifty closed the week 1.3% down at 5359. Foreign institutional investors (FII) sustained their interest, however, as foreigners bought a net $308mil of cash equity. The real story on market breadth was again the concentration: 70% of the points’ loss on the index was down to just five stocks which together make up no more than 15% of market cap.


We had a late runner in the quarterly results race this week. Bosch, one of our auto sector holdings, pleased the market with an eleven percent rise in sales and a 22% boost to profits.  Otherwise, the market was dominated by ONGC. The company plans to spend $5bn developing ten oil and gas clusters to increase production by 4mil tonnes per annum by the end of FY14. ONGC is also in the process of negotiating its first venture into the US shale gas space, planning to spend up to $1bn.


The first report of GDP data for Q3FY12 was the lowest number for twelve quarters: 6.1%, a reduction largely caused by a 1.2% decline in private investment. In terms of sectoral contributions, agriculture remains a bit above average at 3.2%, industry was a relatively weak 3.6% and services remained top dog with 9.4% growth. The overall average for FY12 to date was 6.9%. The Indian Purchasing Managers Index (PMI)  is still near an eight-month high, suggesting expanding net growth in manufacturing.


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


ICEMAN