18 Dec 2014

Long period of monetary easing

There was some interesting news on fund flows. Asia ex-Japan funds increased their India weightings by 2.1% to 13.5% over twelve months to end-October and Global Emerging Markets funds increased their weightings by 2.6% to 11.6% over the same period.  There have been substantial redemptions in funds benchmarked against the MSCI Emerging Markets Index, including $1bn in the last month alone. This would tend to confirm that the smart money has been positioning in India for the apparently inevitable start of a long period of monetary easing. The return prospects for Indian equities in 2015 seem assured.

17 Dec 2014

UN forecasts 6.3% plus for India in 2016

To help state-owned banks meet the Basel III capital norms by 2019, the government plans to sell down its investment in 27 banks to 52% from current levels of 57 to 84%. The plan is to generate some $26mil in capital for the treasury as well as giving the banks concerned the scope to raise additional public capital. The UN is forecasting India’s GDP to grow by 6.3% in calendar 2016, making it the fastest growing economy in South Asia. Meanwhile, the news on inflation continues to improve: November’s CPI contracted more than expected to 4.4%, as food prices appreciated by just 3.6% (vegetables in reverse by 10.9%). Core inflation fell back from 5.8% to 5.5%. October IIP contracted by 4.2%; the big contributor was -18% in Consumer Goods, due to a huge drop in mobile phones and accessories after Nokia closed a production facility. Public holidays also had an effect: five instead of last year’s two.

16 Dec 2014

The visit of Putin: oil, helicopters and nuclear power

Russian President Putin visited India last week was was welcomed as “…our most important defence partner…”, announcing that Russia will manufacture one of its helicopters entirely in India. A commitment to nuclear power generation was underlined with the announcement that Russia will supply twelve more reactors over the next 20 years. The first reactor at the Kudankulam nuclear power plant in Southern India was commissioned last year, increasing nuclear capacity by 25%. Another reactor at the same site will be commissioned next year with two more to follow. There will be a new study undertaken to identify more suitable sites. There will also be cooperative studies in the field of oil and gas exploration and production, including an evaluation of a possible Russia/India oil pipeline to transport Russian oil directly to India’s ultra-modern refineries in Gujarat. Prime Minister Modi expressed disappointment at declining bilateral trade between the two countries and Mr. Putin undertook to help reverse the negative trend.

Reform agenda set back

In a temporary setback for the government’s reform agenda, the states’ GST panel has rejected the latest draft of the enabling Constitutional Amendment Bill. The contentious issues are to do with taxation of petroleum products, inter-state entry tax and the process for compensating states for lost revenues. The government remains confident of passing the legislation nonetheless. A Rajya Sabha committee passed the enabling legislation to reform FDI in the Insurance sector, raising the foreign holding limit to 49%. This will probably set off a trend of consolidation and reorganisation in the sector.

15 Dec 2014

Investments and innovations

In response to rising input costs, including in payroll and energy, Bajaj Auto will push through price increases in its top two product lines in January. ITC is planning to invest more than $150mil in the rollout of its new product lines in dairy and juice products in the first three months of 2015. Lupin has launched its authorized generic version of Celebrax capsules for osteoarthritis, rheumatoid arthritis and acute pain in the US. The government is reworking the subsidy-sharing formulae on remaining subsidised products to reduce ONGC’s subsidy burden by 25%.

Smart money in place

In the private sector, Ultratech Cement is negotiating bank finance for the acquisition of Brazilian assets of Holcim, which have to be disposed of to meet regulatory requirements for its merger with Lafarge. Kotak Mahindra Bank has received RBI approval to set up a general insurance subsidiary; the insurance regulator has already assented. ONGC Videsh is to acquire interests in two Russian oilfields: Vankor, with estimated reserves of 500MT and Yurubcheno/Tokhomskoya with more than 990MT of reserves.

The balance of payments looks sound for now, foreign reserves are strong and the RBI seems to be well-positioned to protect India from the effects of external shocks. Meanwhile, market momentum may be slow through year-end as monetary easing, the big trigger for the next upward move in equities looks set for early in the New Year. The smart money may be in place already.

Equity markets and oil: down

This was a broadly negative week for equity markets as the oil price continued to sink, prompting an outbreak of pessimistic sentiment about the long-term implications. Indian markets joined the sinking trend with the Nifty giving up 314 points to close 3.7% down at 8224 after trading in a range of just over 4%. Daily trading volumes again exceeded the trailing average at $3.3bn. Foreign institutional investors continued their strong support, buying a net $641mil and domestic institutions joined them on the buy-side, picking up a net $96mil. Volatility moved up as the India VIX traded steadily up during the week from its opening at 12 to close at 14, though that is still relatively low. Market breadth was nearly ten to one on the downside and there was heavy concentration of negative points’ contributions from the IT, Energy and Mining sectors as well as some financial stocks. In spite of the overall negative momentum, Nifty futures closed at a premium of just over 2% to cash. 

No extra tax for Vodafone

Some important data points were announced. Second quarter GDP growth was 5.3% compared to 5.7% in the first quarter but still ahead of the comparable period a year earlier, so the overall rate is likely to show a healthy advance for the full year. Agricultural production was notably weaker, due to a slower onset of monsoon rains and eventually a weaker kharif season. Manufacturing was also weaker in the second quarter, although by November the HSBC PMI number had advanced from 51.6 to 53.3, signalling acceleration in manufacturing activity. Reform continues in a low-key piecemeal way. The winter session of parliament has so far seen the Congress party swing behind the Bill to amend FDI in the Insurance sector and the government also announced a relaxation of rules governing FDI in the Construction sector, which did not require statutory action. In a notable boost to foreign investor sentiment, the Attorney General has said that the Income Tax Department should not appeal the Bombay High Court’s decision in October that Vodafone should not have to pay a $520mil extra tax demand.

14 Dec 2014

The gift of cheaper oil

The falling oil price is the gift that keeps on giving for the Indian government. It helps the balance of payments by cutting the cost of the 80%+ of its energy requirements Indian must import. More immediately, it has encouraged the government to eliminate the burden of diesel subsidies. Even further, it is allowing the government to address the current year’s fiscal deficit by slipping in excise duty increases as the retail price of petrol and diesel falls: this week it has taken a second bite at this apple. Finance Minister Jaitley has said that things like cheap LPG for affluent families, amongst other hidden benefits will be in the cross-hairs shortly and will probably be eliminated as soon as they can be targeted. Meanwhile, the programme of Uniform ID registration is being stepped up with short range targets for completion in order to increase the efficiency of benefit transfers as soon as practicable. Action on the non-revenue side is about to begin as well: stake sales in Coal India, ONGC and Steel Authority (SAIL) are to be completed by end-January 2015 to raise a prospective $10bn for the treasury. This effort began on Friday with an offer of more than 200mil shares in SAIL at Rs83 a share to raise nearly $300mil; the offer was well oversubscribed.

13 Dec 2014

Investors expect monetary easing

Foreign investors are clearly positioning themselves for monetary easing, with steady buying of cash equities, but even heavier buying of fixed-income securities: government bond yields have been under pressure and trade at a discount to the repo rate. There was some speculation that the RBI might kick-off rate-cutting at the December policy review. In the event, the optimists were frustrated but the RBI commentary turned notably doveish, suggesting rate cuts early in the New Year, possibly without waiting for the next policy review in February. The market widely expects 50 basis points of cuts next year but Deutsche Bank is now predicting as much as 100 basis points. Overall, if inflation tracks within the RBI’s target range, historic evidence suggests there is room to cut as low as the 5% range, providing sustained support to capital investment and hence equity markets over the medium term.

12 Dec 2014

New intra-day highs: US, China, India

The US, Chinese and Indian stock markets hit new intra-day highs over the past few weeks as global investors responded to policy moves and expectations, as well as a rapidly declining oil price. OPEC appears to be settling in to a long campaign to recover market share and price leadership. This is good news for India, where the Nifty keeps adding points. Average daily trading volumes at $3.7bn continue to drag the trailing average upwards as FIIs bought a bet $502mil and this while domestic institutions sold a net $357mil. Breadth was narrow, with advances just ahead of declines but concentration was evident, with the FMCG sector a big contributor: ITC and HUL together worth just 16% of the Nifty, contributed 87 points on the upside.  HDFC and Reliance, together worth 9% of the index, dragged it down by 27 points. Volatility continued to subside, with the India VIX trading mostly down from its opening at 14, hitting 9 before closing at 12. Nifty futures closed at a premium of 1.6% to cash.

28 Nov 2014

Lot of M&A

Last week we saw a record number of transactions in the M&A field with seven deals announced worth around $4.5bn. Leading the way was our holding Kotak Mahindra Bank which is to acquire ING Vysia Bank in an all-stock deal worth $2.4bn, paying 750 shares for every 1,000 of ING Vysia. This is the biggest transaction ever in India’s banking sector and is seen as the forerunner of other transactions to come as the sector consolidates. The share prices of other potential target banks in the private sector rose sharply in response. Also, State Bank of India drew interest as it is expected to merge with five of its state-bank associates. Other transaction were announced in IT where Tech Mahindra acquired a US telecom network service provider, in FMCG where Future Group acquired a convenience-store chain and in the Power sector, where JSW Power acquired two hydro-electric units of JP associates for $1.6bn. Overall, the value of the transactions announced this week has brought the total value of Indian M&A in 2014 above the aggregate of $22.3bn in value in 2013.

27 Nov 2014

Special measures to support growth

We will see portfolio inflows based on the anticipation of monetary easing, based on sustained improvement in inflation figures and improvement in the fiscal and trade deficits thanks to subsidy cuts and softer commodity prices, especially oil. The first half of 2015 will probably see cuts of 50 basis points in the repo rate and some analysts even see the possibility of monetary easing starting with the December policy meeting. Either way, recent acceleration of inflows, especially to the debt market are undoubtedly positioning for this. In spite of the Fed ending its QE3 exercise, the Japanese Central Bank has just accelerated their programme, the ECB is on the point of doing the same and the Chinese central bank has just joined the party. It looks like easy liquidity will be supporting global markets for some time to come. The RBI has a lot of room to cut rates before it has to contemplate 'special measures' to support growth and its action to strengthen India’s external balances provide increasing protection against external effects. Thus the outlook for Indian equities remains favourable. 

26 Nov 2014

High Court, Shell Vodafone

The story of the week is the sustained flow of foreign portfolio investment this year, which has now reached $39.4bn, already substantially higher than the aggregate for last year. Two threads to this story, the first is the revival of investor sentiment driven by expectations of reform and recovery in GDP thanks to the decisive election victory of Narendra Modi and the NDA alliance of his BJP. Although the impact has by no means been a 'big bang', after a brief slowdown for two important state elections we have been seeing a continuous drip feed of executive and bureaucratic action to revive stalled development projects and cut red tape. Next week sees the start of the Winter session of the Lok Sabha, in which the government will move some important reforms which require legislative action, including on GST, FDI in the insurance sector, as well as amendments to existing statutes on employment and land acquisition. Significant progress in these areas will support the markets. This week, there was another major boost to sentiment as the Mumbai High Court dismissed a major case brought by the tax authorities against Shell, claiming tax on an investment transaction on lines similar to the notorious Vodafone case which is now in arbitration. This outcome should rein in some of the overambitious actions by the tax authorities over recent years which have put a damper on FDI decisions. 

Fitch ratings up

In the meantime, Fitch Ratings has increased its forecast of Indian GDP growth to 5.6% for the current year and Moody’s has upgraded its outlook for India’s corporate sector from “negative” to “stable”. They believe companies may expect improving credit conditions based on economic recovery and pro-market economic reforms from the government.

21 Nov 2014

Favourable valuation

The outlook for India is highly prospective and valuation levels remain favourable; Himalayan Fund will share in the upside. The government has reached agreement with the US on public food stockpiling, removing a big obstacle to a global trade facilitation deal which has been stalled for months. Government rice procurement is 8% lower this year than last: 9.2mil tonnes against 10mt. In the corporate sector, Bajaj Auto hopes to drive its domestic market share up to 30% with product launches in its Pulsar and Discover premium ranges as well as a relaunch of its Platina entry-level two-wheeler range. HDFC Bank was dropped from the MSCI India index because of confusion over the application of FDI/FII limits to its shareholding structure. The Foreign Investment Promotion Board is reported to have approved an increase in the bank’s overall foreign investment limit to 74% this week. This will facilitate capital-raising in future.

20 Nov 2014

Positive earnings surprises

Our quarterly report watch this week saw two disappointments. ONGC, the public-sector integrated oil giant reported advancing sales volumes but softening energy prices affected realisations badly, so net revenues contracted by 8.8% and profits fell by 10.2%. Balkrishna Industries, exporter of off-road tyres, ran into intense competition in a weakening global market, so net sales advanced by just 5%. The competition drove prices down sharply though, affecting margins, so profits declined by 16.5%. Overall this quarter, with more than 70% of the top hundred having reported, positive earnings surprises were reported by 44% of companies but some full-year forecasts are being downgraded, especially in the consumer and energy sectors.

19 Nov 2014

G20, Nifty and index gains

World leaders sashayed through China for an APEC summit before closing the week on the sun-drenched Gold Coast in Australia for a slightly fractious G20 summit. Meanwhile, markets moved in a band of plus or minus 1%, looking forward to a prolonged period of accommodating monetary policy and soft energy prices. India continues to bask in its self-propelled sweet spot, enjoying the fourth successive week of modest advances setting new records as it goes. The Nifty added 53 points, closing 0.6% ahead at 8390 after trading in a range of 1.3%. The upside movement was heavily concentrated: three stocks worth just 12% of the index contributed almost 100% of the weekly points’ gain.

14 Nov 2014

GDP growth forecast 2015: upwards

PMI data for October gave a mixed picture. Manufacturing PMI increased from a nine-month low of 51 to 51.6 but Services PMI fell again, this time to a six-month low of 50. The overall PMI dropped from 51.8 to 51 in October. Nonetheless, forecasts of GDP growth for FY15 are inching upwards, averaging 5.7% now. Kharif crop sowing in the below-average monsoon season reached 100mn hectares, compared to 103.3mn in 2013. Bank credit growth in the first half of the current fiscal year amounted to just 1.7%. The Finance Ministry is asking the RBI grant banks flexibility in lending standards for funding stalled infrastructure projects to give a quicker boost to capital expenditure.

13 Nov 2014

Uniform ID for all

The defeated Congress Party has announced that it will support reform legislation to be initiated by the NDA government in three key areas of reform: the enabling legislation for constitutional amendments necessary to introduce GST nationwide, the reform of FDI rules for the insurance sector and the coal mining bill, all making their way into parliament in the winter session. The government also intends to introduce amendments to the Land Acquisition Act to exempt public sector enterprises from certain aspects and facilitate stalled infrastructure projects. The government wants to extend then use of Aadhaar (uniform ID) numbers to social welfare schemes and so has instructed the UIDAI and National Population Office to complete registration of the entire population of 1.2bn by March 2015. Registration currently stands at 50-60%.

12 Nov 2014

Interview Ian McEvatt

Himalayan Fund had a return of +39,7% over the last twelve months. How did this happen?

“Well first the Indian economy did well. That was refelected in the strong performance of the index of the Mumbai stock exchange, the S&P CNX Nifty. The index rose about 30% over the last year. Compared to a lot of other markets a very strong performance.”

Yet Himalayan Fund did even better.

“Yes, we did. We gain almost 40% in the twelve months, starting October 31st, 2013. We are very selective when it comes to the companies we invest in. And our approach paid off. Not only this year by the way.”

Himalayan Fund NV is listed in both Amsterdam and London. Why is that?

“We decided to have two listings to make it as easy as possible for investors to buy and sell shares in the fund. That offers optimal liquidity and in doing so we offer investors low costs and an easy entrée in the India market. Keep in mind that Himalayan Fund is one of the few foreign investors that is able to trade on the Mumbai stock exchange directly, so without intermediairs. That saves costs and offers the investor the best bang for his buck. Other funds will need one or two ‘middle men’ to invest in India and that means they do not benefit from the full performance of the fund.”

How do you think the Indian economy will perform on the short term?

“The outlook for the Indian economy is positive, very positive indeed. Since the Indian New Year festivities around Diwali (late October) ended, the CNX Nifty Index has held above the key 8,000 point levels. That are record levels. With a declining inflation and the expectation of monetary easing I see a bright future for Indian equities.”

Are the policies of the Mondi government of influence?

“Yes, they are. The new government is clearly cutting down on regulatory. That will offer companies a better base to invest. The team of Modi is clearly looking at various ways to stimulate the economy. The wins of the political parties that support Modi during recent regional elections are a huge support for this policy.”

And other positive signs for the India economy?

“It is clearly positive that the prices for soft commodities are going down. That will help the Indian economy. And with a lower oil price the government needs less funds to support the subsidies on fuels, that will be helping the fiscal balance. I see a GDP growth of 7% or more as possible. We expect market momentum to be sustained through year-end and a strong 2015, driven by the inevitable monetary easing with interest rates being cut from the 8% level, starting early next year. It is not hard to see the Nifty reaching 10,000 over 12 to 18 months. 

11 Nov 2014

India, not just an emerging market

Investment strategists have been warning investors off emerging or developing markets this year on the grounds that the end of quantitative easing in the US would precipitate outflows of hot money. India has distinguished itself from other emerging markets by strong investor sentiment and sustained inflows all year. Investors who ignored India or withdrew funds have missed terrific returns. With market valuations in India still at around the mid-point of their historical averages, there are still returns for the making. Even with the rest of the world generating sluggish growth at best, investors should bear in mind that the Indian economy is 60-70% domestic demand driven. India’s stock exchanges are well regulated and fairly liquid and much different to ‘emerging markets’.

10 Nov 2014

Economic strength, one of three

The US, UK and India are only three substantial world economies showing signs of economic strength. The US and UK could still be restrained by sluggish global growth constraining exports. The India economy is still substantially domestic demand driven, so continuing commitment to reform and unblocking of stalled infrastructure development projects by the government should boost the drivers of economic growth over the medium term. The bonus of soft commodity prices helping to reduce chronic inflation and a tricky fiscal deficit should usher in a period of monetary easing starting next year. This provides an optimistic backdrop for the India equity markets for the foreseeable future. Himalayan Fund still looks like  a good investment.

3 Nov 2014

Sustainable upward momentum

The global equity selloff came to 7% over twenty days, which is around the average for mid-stream corrections. Meanwhile, India enjoyed the Diwali festival, with the market closed for two days and a typical dearth of corporate news. Over the past two weeks, the Nifty added 532 points carrying it comfortably above the 8000 level adding 7% to close at 8322 after trading in a range of 7%.
Breadth was strong with advances ahead of declines by six to one. There were some heavy points’ contributors mostly in the financial sector, as well as recovering counters in IT which had been heavily oversold earlier in the month. Volatility was again noticeable for diverging from the global trend: the India VIX opened the period at 16 and softened to 12 before closing at 13 for a decline of three points. Nifty futures close at a premium of 1.6% to cash as the upward momentum is expected to be sustained. 

20 Oct 2014

Diwali around the corner

With Diwali approaching there has been little corporate news other than results announcements. Yet the ingredients for a boost are coming together. The recent market setback should be viewed as an opportunity. Inflation moving favourably, oil price retreating, eventually these movements will bring monetary easing and a further policy boost to GDP growth.

The last week saw a sustained selloff in equity markets as investors panicked in the face of widespread evidence of economic fragility and speculation about the imminence of monetary tightening in key economies. In the event, reassurance from central bankers calmed markets at the close but not before heavy losses had been incurred. Amidst all of this, Indian markets were brittle, as the Nifty shed 80 points to close down 1% at 7780 after trading in a range of 2.6%. 

Compare this to its recent highs around 8300 and we remain short of a 'correction', down 6.3%. This week’s fall was driven by net equity sales of $405mil by FIIs, as domestic institutions were net buyers of $281mil. Market breadth was negative though not deeply so: declining stocks were ahead of advances by 3:2. There was heavy concentration in three stocks, Reliance, TCS and HCL Tech, which were sold heavily on disappointment with quarterly results; together they contributed 80% of the net points’ loss. Unlike developed markets, volatility has remained subdued. By the market’s close, rumours of substantial gains in two state elections by the governing BJP were boosting sentiment for next week’s opening.

15 Sep 2014

Tip-toed into autumn

Equity markets have tip-toed into autumn, faced with the continuing concerns of Russian expansionism and the barbarity of the IS caliphate. The ECB has finally launched its version of QE, just as the Fed is about to exit its own, yet markets seem to be holding their nerves. In India, the Nifty has added 152 points to close 1.9% ahead at 8106 after trading in a range of 3%. The benchmark index has held firmly above the 8000 level on the strength of FII inflows of more than $1bn so far in September; total FII flows now amount to $30bn so far in 2014, of which $13bn has been directed to buying equities.

In the short-term, the market will probably be influenced by external factors, but even at the current record levels of the Nifty, the market valuation remains around the long-term average, especially on a one year forward basis. Positive investor sentiment and the sustained FII inflows suggest Indian equities remain a good buy.

1 Sep 2014

Strong growth expected

At the close of the first quarter earnings season, the overall outcome looks prospective: although revenues improved modestly, EBITDA margins improved by about 1.5% on average. Moving them back up towards their long-term average. With corporate borrowings lower, interest costs also contributed to improved profitability, so that it looks like a cycle of earnings upgrades is upon us. The market has appreciated by 5.8% over the past two months but earnings have outpaced it, at 7.2%. So the market PE multiple has contracted from 16.3 earlier in the year, to 15.5 now. Future earnings are now being forecast to grow at 16% this year and 17% next, giving room for further market appreciation in the near-term. Longer-term, Friday’s announcement of a jump in GDP growth to 5.7% in the first quarter gives reason for optimism for sustained market momentum over a two to three year period.

Excellent results

The half-year report for Himalayan Fund has been posted on the Fund’s website at www.himalayanfund.nl , showing excellent performance in the first half-year; this has been sustained so far in the second half. The outlook for the Indian markets is for continuing improvement in earnings, supporting current valuation levels and offering the prospects of multiple expansion over a sustained period. It is time to buy the Fund, look on the website for instructions on how.

11 Aug 2014

Interesting quarterly results

Another raft of quarterly results of interest to us, starting with Larsen & Toubro which reported a disappointing 9% advance in sales and profits as weak execution outweighed strong order flow. ITC reported a 25% increase in sales and 15.6% increase in profits; Pidilite reported 20% increase in sales and 5% in profits as raw material costs accelerated. Healthcare stocks excelled again: Lupin reported sales 35% ahead and profits 56% ahead on excellent export market performance; Torrent Pharma reported 15% sales growth and 72% in profits, also supported by overseas. Nestle India grew sales by 9.3% and profits by 6%. Magma Fincorp grew NII by 7.8% but accelerating cost of recoveries and rising loss reserves drove profits down by 20%. ICICI Bank reported NII ahead by 13% and profits up by 17% and finally, Balkrishna drove sales up by 18% and profits by 13%.

29 Jul 2014

Summer doldrums?

Into the summer doldrums and journalists have latched onto the fact that the bosses have hit the beaches and the trainees are manning the desks. Reactions are bound to be exaggerated. US equities remain near record highs and foreign interest is keeping Indian equities near peak levels. The next burst of speculation will come out of reading between the lines of the proceedings from Jackson Hole next month. Meanwhile, the Nifty has advanced since our last commentary by 241 points, closing up 3.2% this week at 7790 after trading in a range of 5.7%. Average daily trading volumes are steady at around $3.2bn compared to a twelve-month moving average of $2.3bn.

Rain is a good thing

The monsoon rains picked up broadly across India, with the deficit against the long-period average narrowing to 24% and more persistent rains forecast for next week. The threat of drought has been lifted, though there is still the possibility of an El Nino effect later in the season. Reservoir capacity is average. Karif crop planting is proceeding, though behind last year’s record levels.