26 Oct 2012

RBI expected to cut interest rates

Good Q2 results and continuing reforms by the Finance Ministry are expected to nudge the RBI towards a token interest rate cut.

Most markets closed last week in the red in spite of relatively positive GDP data in the US and UK. India was only marginally in the red, as the Nifty shed only 20 points, to close 0.4% down at 5,664 points.

About a quarter of index stocks have reported their Q2 results and positive surprises are running ahead of negatives by a comfortable margin. Good results were not confined to specific industries: companies in banking, construction, health care, technology, consumer goods and other sectors all reported improving results.

The Finance Ministry is scrutinizing departmental spending plans with a view to cutting expenditure which was committed in previous budgets. The Ministry has also accelerated negotiations with the states over the introduction of a national Goods and Services Tax. This is a key element of fiscal consolidation and is forecast to deliver a 1.5% boost to GDP on implementation, which may now come in FY14.

The 14% hike in the price of diesel fuel in September, which was the first decisive step in cutting the fiscal deficit, saw the growth in demand for diesel drop to 2.8%, the slowest rate for over a year.

Next week’s monetary policy review from the RBI will set the tone for the market for the rest of the year. Expectations have now broadly swung behind a token rate cut and another cut in the banks’ cash reserve ratio. The central bank may now feel obliged to row in with the recovery impetus given all the action under way at the Finance Ministry; inflation looks like heading into its comfort zone by year-end, so it may be willing to take the risk at this stage.

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

19 Oct 2012

In quiet week, focus shifts to company results

The Indian stock market had one of its less exciting weeks, despite some interesting company news.

In the week ending 19 October, the Nifty added just 8 points for a gain of 0.1%, closing at 5,684 points as interesting new investment decisions emerged in the private sector. Reliance Industries followed up its recent good results with a plan to expand capacity at its Jamnagar refinery, the biggest and most efficient in the world. It is reported that Reliance is in negotiations with AT&T to sell 26% of its broadband service provider Infotel for $3.6bn. Jindal Steel and Power is believed to be in negotiations to acquire an iron ore mine in West Africa for $2bn, in order to meet demand for raw materials from its Indian and Omani plants. ICICI Bank has signed an agreement with Ecobank Transnational to provide banking services across their combined footprint in India and Africa.

Wholesale Price Inflation rose to 7.8% in September but the number accounts for almost the entire hike in the price of diesel; food inflation declined by 1.5 percentage points. This may reverse to some extent in October with the lower-yielding karif harvest and a seasonal surge in demand. By December, a bumper rabi crop, combined with a favourable base effect should help drive the WPI down to the RBI’s comfort range by March. Any evidence that this trend is assured may move the RBI to some form of easing and some analysts are expecting a gesture on Interest rates and CRR at the month-end monetary policy review. This would provide further underpinning to the market rally. In the meantime, we remain in the thrall of the newly-invigorated government. The Prime Minister is apparently ready to announce the launch of a national payments system based on Uniform ID card numbers; this is expected to curtail corruption in the payment of food, fuel and employment subsidies.

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

10 Oct 2012

Optimistic outlook for the Indian markets

Over the next six months or so, we will see the markets supported by decisive government action which has gone some way to restoring investor sentiment. The proof of the pudding is in the eating: now we need to see some implementation. Some of the key reforms will require parliamentary approval but the government seems unusually determined to see them through. It must be working on the assumption that few potential opponents can countenance an election in the short term. This is because of lack of leadership, organization or funding. The odds of facing down troublesome opponents such as the Trinamool Congress look good.

The question mark is when will the RBI row in to launch a sustained cycle of monetary easing. The monsoon season, which ended with steady downpours which cut the expected deficit sharply, replenished reservoirs to  9% above the long-tern average and left soil in good condition for sowing. This promises an excellent rabi crop, which, combined with base effects will bring downward pressure on food inflation later in the year. This should allow the CPI to subside towards the RBI's target and allow the monetary easing the economy could do with.

So from where we are now, allowing for lumps and bumps caused by waves of concerns at the global level, Indian markets should be set for steady advances during the next two quarters. If the monetary easing follows as expected, the rally could be sustained well into next year.

Meanwhile, Himalayan Fund's board has taken steps to cut the expense ratio, which combined with the return of upward momentum in the market should help investor returns from this quarter on. Investment expenses have been set at a lower, fixed budget, allowing steady improvement in the TER as assets grow. The ride may be choppy but the outlook looks good from here.

5 Oct 2012

Is this rally one for the long run?

The Indian government continues its reform policies as a flash crash hits the stock market.

The Indian government’s new-found vigour sustained market sentiment as the Nifty index added 44 points to close 0.8% up at 5747, after trading in a range of 18.9%. This extraordinary trading range is due to a “flash crash” on Friday, October 5, as a series of erroneous trades worth about $125 million entered by a broker triggered a sharp selloff. Market circuit-breakers kicked in to close trading for 15 minutes but only after orders in the system were executed. The whole episode was over in a trice but the stocks involved saw wild swings in price; they included Reliance Industries and HDFC Bank.

The government kept up the reform momentum with a slew of decisions from Cabinet on Thursday, October 4. These include 49% FDI in insurance and an equivalent limit in the pension sector. Most beneficial in the long-term, the Cabinet approved the establishment of a National Investment Board under the direction of the Prime Minister, to monitor investment projects of more than $200 million. This offers the prospect of ensuring that bureaucratic bottlenecks are exposed to high-level remedy and progress can be maintained.

The final analysis of this year’s monsoon shows an overall deficit of 8%. This is far short of the drought earlier feared but the intense late rainfall guarantees a good late harvest. In the short term, there will be little relief for food inflation because of lower yields expected in the early harvest but as the year advances, inflation is expected to moderate with the second harvest. This should deliver conditions in which the RBI can ease monetary policy to boost the government’s efforts to revive growth.

So, for investors, the outlook is for the market to be sustained by policy and reform vigour in the short-term and by a long cycle of monetary easing further out. Meanwhile, imminent company results are expected to show subdued revenue growth but higher margins due to easing input costs. The recent rally may have a long run ahead.

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

ICEMAN