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.

ICEMAN

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.
ICEMAN

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.

ICEMAN