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.