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.