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.