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.