28 Jan 2015

Riding the wave of monetary easing

Riding the wave of monetary easing, investors will be watching company results for reasons to drive ratings beyond the long-term average. The latest quarter’s numbers are a mixed bag so far, though on balance they are just in line with expectations. ITC reported sales ahead by 2.5% and profits by 10.5% though cigarette volumes disappointed as regulatory conditions are getting tougher. South Indian Bank reported net interest income down by 8.7% due to an  interest income reversal and profits by 37.8% as the new CEO added to provisions. Kotak Mahindra Bank sustained its excellent record, boosting NII by 20% and profits by 21%. Supreme Industries reported sales ahead by 9% but profits were squeezed by low polymer prices, falling by 43%. Agro Tech Foods saw sales fall slightly and profits reduced by 28%. Finally, Ultratech Cement reported sales ahead by 15% but profits suffered from higher interest and tax charges, falling by 11%.

27 Jan 2015

India as an exception

The prevailing sentiment seems to be that the QE action announced by the ECB would be enough to offset the end of QE in the US in terms of liquidity in global markets. Benign inflationary conditions may even postpone the start of interest rate increases by the Fed into 2016. Mrs. Yellen may not wish to take the stick to financial markets until there is more evidence that the middle classes are benefitting enough from economic recovery to sustain aggregate demand. In Europe, Mario Draghi is now going to need policy support from individual governments to capitalize on his monetary action to ensure recovery takes hold. That is by no means a given. Meanwhile strategists are again promoting the US Dollar for 2015, along with US and European equities while still cautioning on Emerging Markets. This year, however, they are singling out India as an exception.

Let us recall some good reasons. GDP growth is forecast in the 6-7% range and rising gently. The external balance is benefitting from the low cost of oil and other import commodities. The fiscal balance will also benefit, presenting the Finance Minister with a favourable background for the Union Budget at the end of February. The Indian economy is still heavily domestic demand-driven, which provides a cushion against weak economic conditions elsewhere. Foreign reserves are especially strong under the management of a highly effective Reserve Bank governor who has finally taken advantage of improving economic data to embark on what looks like an extended period of interest rate cuts. Following his first 25 basis point cut, the market is expecting anything from another 25 to 75 basis points in reductions this calendar year.

26 Jan 2015

Year of good performance

The state visit by US President Obama will be curtailed because the President needs to go to Saudi Arabia to pay his respects on the death of the King. Nonetheless, the visit is being hailed as historic because it is the first time a US President has visited India twice while in Office. The visit has delivered a conclusive agreement on the civilian us of nuclear power with India, which is rumoured to include an insurance pool to cover suppliers against liability for accidents. The agreement saw the US dropping a demand that all supplies of nuclear fuel be fully traceable after delivery, which India felt was intrusive. It would be too much to expect that everything is going to go swimmingly for investors in India this year but the balance of probabilities suggests that they will enjoy another year of good performance in 2015.

Strong week for global equity

Global equity markets had a strong week as they absorbed the news that the European Central Bank had finally adopted QE, at a level which surprised positively. India continued to enjoy a glow from the start of monetary easing, with the Nifty adding 322 points to close 3.8% up at 8836 after trading in a range of 4%. Daily trading volumes stayed above their rolling average at $3.7bn as FIIs returned in size on the buy side: investing a net $708mil as domestic institutions sold a net $475mil. Volatility was stable, the India VIX staying in the high teens after a brief drop to 13, closing at 18 for a gain of a point on the week. Market breadth was very strong with advances outnumbering declines by six to one; concentration was mainly in the Financial Sector which made the largest contribution to the points’ gain. Index futures closed at a premium of 1% to cash.

23 Jan 2015

Maybe governor Rajan will surprise again

Helpful data points came in the form of another low CPI print: 5% in December in spite of unfavourable base effects; WPI also came in better than expected at 0.1%. November’s IIP came in at 3.8% compared to -4.2% in October: capital goods and basic industries were stronger even as weakness in consumer durables continued. This background brought a helpful surprise to the markets, however, as the RBI governor decided to deliver on one of his promises: to bring a cut in interest rates without waiting for another policy review meeting. The market was duly surprised, absorbed the 25 basis point cut and started looking for the next cut to follow the Union Budget. Maybe governor Rajan will surprise again, inflation looks like settling well below his target of 8% for some time.

Indian government bites the cherry

The government has taken a third bite at the cherry by further increasing duty on petrol and diesel at a time when it can be absorbed without increasing the retail price. In spite of fiscal expenditure hitting 99% of budget by the end of November, moderating fuel subsidy costs and benefits from the declining oil price should enable the Finance Minister to meet the adjusted target for the fiscal deficit of 4.1% of GDP in time for his Union Budget at the end of February. The peak power deficit fell to a low of 3.3% in December, thanks to the effects of improved coal supplies, capacity additions and the connection of the southern transmission network to the national grid. 

22 Jan 2015

Tech sector leads Q3 results

The third quarter results season has kicked off with the Tech sector leading the way as usual. Infosys surprised on the upside with sales up by 6.3% and profits up by 12% TCS reported sales ahead by 15% but profits disappointed at 5% as realizations in the insurance sector in particular came under pressure. The company was forced to make a strenuous denial of persistent press rumours about staff layoffs. Cyient reported revenues ahead by 22% and profits by 48% as the company announced the acquisition of 74% of the shares in Rangson’s Electronics, a Mysore based systems design and manufacturing company. Cyient hopes to increase revenues in this segment from 20% to 70% of the total by 2020. Finally, in the first flush of announcements, Bajaj Auto reported sales ahead by 11% and profits by 7% as it responds to intense competition by developing entry-level products to attack this segment in 2015; it makes up 66% of the market.

Domestic momentum in India

The usual concentration of USFDA approvals around year-end has benefitted Lupin. It has received preliminary approval to market its Prezista formulation for treating HIV-1 infections. It has also launched its generic Diovan hypertension drug in the US. Kotak Mahindra Bank shareholders voted to approve the bank’s merger with ING Vysia Bank by exchanging 750 KMB shares for 1,000 shares of ING Vysia to form the 4th largest private sector bank in India. Regulatory approvals are still outstanding but the merger is expected to be completed on April 1st. Infosys has implemented a billing and payments processing platform for LA Care Health, the biggest public health system in the US with 1.6mil members.

The New Year is starting well in Indian markets, with domestic momentum drivers prevailing over external negatives. Return prospects for the year remain excellent. 

Silver Jubilee, 25 years Himalayan Fund

Himalayan Fund NV enters its silver jubilee year and India embarks on a period of sustained monetary easing. So far this year, the Nifty has already added 253 points or 2.8%, rising to 8514 after trading in a range of 5.8%. FIIs were in two minds at first: heavy sellers as negative Euro sentiment was driven by political uncertainty in Greece and doubts about benefits from the slide in the oil price prevailed; then buyers again after the RBI’s surprise cut in interest rates. Domestic investors mopped up the modest supply of stock. Average daily trading volumes stayed at about the rolling average of $3.2bn. Market breadth was neutral, with advances just a touch above declines overall. At first, FMCG stocks led the points’ contributions on the upside but later this was balanced by financials on the back of interest rate cuts. Volatility has established a higher base this year as the India VIX traded up from the low teens, hitting 19 before closing at 17 for a gain of two points. Index futures closed at a premium of 1.4% to cash as the markets anticipate moderately good results to reinforce monetary easing as the driver of momentum.

11 Jan 2015

Geo-politics, EU, rates, 2015 ...

The external environment does not look great, especially on the Russian front and in the Middle East. On the other hand, geo-politics and market share manoeuvring will probably keep the oil price down. In the east, China looks like providing a positive policy environment, while Japan is bent on heavy monetary stimulus. The European Union seems headed in the same direction even if the US and UK may end up increasing rates, slightly, as the year progresses. On balance though, markets seem to get more momentum from monetary action, so liquidity should remain supportive for most of 2015. It is probably worth listening to those strategists recommending a strong overweight position in India, even if other emerging markets are not that favoured.

10 Jan 2015

Domestic indirect tax reform, a plus

In the longer term, it looks like domestic indirect tax reform is on the way. Enabling legislation for a constitutional amendment to allow a national goods and services tax (GST) to replace a myriad of central and state taxes and levies has been introduced. The entire legislative process should take about a year, during which an enabling committee representing the states will manage implementation. The target date is April 1st, 2016 and implementation is forecast to provide a boost of up to 1.5% to GDP. Meanwhile, monthly CPI inflation dropped to 4.3% in November. Favourable base effects may be running out but the benign environment for food and energy prices looks like keeping the headline numbers within the RBI’s target range. The RBI says that sustained low numbers will allow repo rate cuts in the New Year, without necessarily waiting for a policy review meeting and the market is expecting early action. The consensus is for 50 to 100 basis points of cuts but the governor remains a bit hawkish, so it will probably be in 25 basis points moves, spread over a long period. Nonetheless, monetary easing has historically supported equity markets in India so the outlook remains prospective for 2015.

9 Jan 2015

Strong fundamentals

Economic data has steadily improved, especially in the second half-year. Meanwhile, the government has enjoyed a gift that keeps on giving, in the form of the falling price of energy, the largest component of India’s trade deficit. This is helping to reinforce India’s external reserve position, which was already moving towards an all-time peak thanks to the management skills of the governor of the Reserve bank, in position since the second half of 2013. It has also provided cover for the NDA government to eliminate key fuel subsidies which have for years been a drag on the country’s fiscal balance. It further allowed them to boost fiscal revenue by increasing duty on petrol and diesel, twice. Finally, a programme of disinvestment of government holdings in public sector enterprises was kicked off in December so Finance Minister Jaitley can look forward to presenting a new budget in the first quarter based on a strong financial footing.

8 Jan 2015

Reforms unfolding slowly

The new government has embarked on its programme facing the prospect of a sullen opposition prepared to defy the NDA’s impressive majority in the lower house of parliament by using its continuing dominance of the upper house to obstruct key legislative action. Strategically, the NDA can selectively use executive ordinances to push landmark reforms and, in extremis, can resort to joint sessions of the two houses, in which it does command a majority, to force key legislation through. So far, however, promised reforms and manifesto pledges have been unfolding slowly and investor frustration with the pace of progress has been reflected in a net withdrawal of some foreign liquidity so far in December.

7 Jan 2015

Standout year for Indian equities

This has been a standout year for Indian equities, as the CNX Nifty made 31.4% in local currency terms, closing at 8283 after gaining a little short of two thousand points. The Nifty price to earnings ratio stands just above its long-term average of 15 while the price to book ratio is at 2.4 compared to a long-term average of just less than 3. The first half-year saw a climb of 20.7% in the index as a surge of foreign portfolio investment anticipated a change of government in the May general election; most of the six-month gain came before the results were known. The second half was spent observing the unfolding of the new NDA government’s policy programme while the index added another 8.7%. The major feature of market liquidity was the sustained flow of foreign portfolio investment, $27bn+ in aggregate, of which $11.5bn+ came into the equity markets. The balance flowed into the steadily liberalizing government debt markets in anticipation of eventual monetary easing.