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.