RBI today kept the much-anticipated icing on the cake repo rate cut unchanged after friday’s mojo by PM Dr Manmohan Singh, view was that the RBI would give us a feel good reason by interest rate cuts.. which didn’t happen.

RBI has its own reasons, inflation is still sticky and with rise in diesel prices it may become sticky more…, liquidity in the system is comfortable compared to three months back, they want to see how the govt’s efforts pan out over  time before they cut the rates i.e how much of fiscal deficit can be actually reduced and what happens to all the QE3 money from US , would they spike up prices of oil and which in turn negate govt’s efforts to bring down the fiscal deficit.

Mr Subbarao would like to weigh all options before going for the rate cut .

Buoyancy doesn’t mean rate cuts !!

Recently I had an opportunity to meet and interact with Mr Dhirendra Kumar of Valueresearchonline.com, a man whose principles for investing is simplicity and understandability, I am borrowing his core principles and exact words ,

In all means by person, by speech,by appearance , by actions he follows these principles to the core which he embodies in himself, the authenticity with which he speaks is a testimony to his beliefs, he can be distinguished as the sage and revered for his approach towards investments.

In these volatile times of economy,markets and its gurus here is a person who is simple,calm and unperturbed which is a measure of his maturity and integrity ,also one who deeply understands Indian markets and its investing public.

I am more than convinced than ever about Valueresearchonline.com, as an frontrunner in providing meaningful information which an investor should seek and understand about his investment decisions.





Initially, I wrote a long note on equity markets and on why it is time to press the pedal on equity investments, but then I was reminded of the saying that a picture is worth a 1000 words. So here is the picture and the abridged note follows.

The message is so simple that one does not have to be an expert to grasp the implications.

Good returns materialize over time on investments made at cheap valuations (meaning low PEs) and PEs are more likely to be low when the news flow is adverse.

Simple, isn’t it! To be successful in investing, one should focus more on value and less on news flow.

Ironically, today, apart from the low PEs, even the news flow is getting better. The issue however is, with the US downgrade, with slow growth in West despite low interest rates / large stimulus, with countries on the verge of default, with rising interest rates & high and persistent inflation in India, with the coming to light of corruption scandals in India with alarming regularity, etc how can the news flow be getting better?

Sau sunar ki, ek luhar ki. This is a popular Hindi saying which means – 100 hits by the goldsmith have the same impact as 1 blow by the ironsmith.

The not so appealing news items mentioned above miss one important happening and that is falling crude prices. Falling crude prices is the blow of the ironsmith, the positive impact of which is more than the negative impact of the rest.

Why so? – The structure of the Indian economy

India is one of the few emerging economies that is a net importer of commodities, oil being the largest. Thus every $20 fall saves the country $18 billion p.a., equivalent to 1.1 % of GDP. Lower oil prices mean lower fiscal deficit, lower inflation, lower interest rates etc. over time.

Indian exports to US/ Europe are only 6 % of GDP. In my opinion, even these are not materially linked to how these economies perform. Consider this: Indian IT exports over last 10 years have grown at a CAGR of 25 % in USD terms compared to 6 % growth in US / European economies in USD terms. Thus, bulk of the growth (nearly 75%) has come from gains in market share which is driven by competitiveness and nothing else. Given the miniscule share of 1.6 % of Indian exports in total world trade and improving competitiveness of Indian exports, there should not be a material impact of slow down in West on Indian exports and even lower on overall Indian economy, given the low dependence of Indian economy on exports. Exports were materially impacted in 2009 after the Lehman bankruptcy as the crisis was unanticipated, due to a paralysis in bank lending and a consequent sharp inventory de-stocking. This is clearly not the situation today.

Downgrade of the US and problems in Europe point to the fact that these economies have lived beyond their means for too long and it is now payback time – growth rates should continue to be low for many years. These also point to the shifting center of gravity of growth in the world economy – contrast the unsuccessful attempts to improve the growth rates in the West with the attempts to slow economic growth in countries such as India / China.

Scandals were already there, that was the bad news. Their coming in the open is good news. In a democracy with coalition governments, change is difficult. In such an environment, change takes place mostly in a crisis. Right from the opening up of the economy in 1992 driven by a balance of payments crisis, to improving the security set up after the terrorist attacks in Mumbai, to increasing diesel prices when the subsidy burden was unbearable, to the likely reforms in power distribution driven by mounting losses of distribution companies, all have been triggered by a crisis. India is in transition – the coming to light of these scandals is welcome – it will lead to change for the better in the way India functions. Some of the welcome changes that are already underway are improving transparency in land acquisition, in allocation of natural resources through a bidding process, better targeting of subsidies though cash transfer to the needy etc.

Growth prospects of the Indian Economy

The chart below clearly depicts how persistently the growth rates have been accelerating by 0.5-1% p.a. every decade. This is in spite of everything or despite so many things! It is almost as if economy is growing due to inertia.

The reasons for this behaviour of the economy are so well known i.e., a young and growing population, reducing size of families, increasing incomes and affordability, rising aspirations, improving availability of credit etc, that there is no need to dwell on these in detail.

What is worth highlighting however is, why barring unforeseen developments of a large magnitude India should grow faster in the next ten than in the last ten years and could emerge as the fastest growing economy in the world. Apart from the above mentioned factors that lead to a secular growth in consumption, capital spending should accelerate as and when interest rates come down. Lower prices of crude in particular and other commodities in general could trigger a reversal in the trend of rising interest rates. Indian exports are also gaining in competitiveness against China because of the depreciation in INR vs the Yuan and the higher wage inflation in China. These are the two key reasons that could lead to a further acceleration in growth rates in the current decade.

A point worth noting here is that despite the impediments, delays, scandals and several rounds of changes in regulation, infrastructure is improving significantly. Apart from the telecom story which is a clear success, India has a rapidly rising number of privately owned world class airports & ports, fast improving inter-city roads, sharply reducing power deficits etc.

In my opinion, there are thus several reasons to be optimistic about the growth prospects and about improvement in governance and infrastructure in India.

If growth persists and if PEs are low, then equity returns can’t be far, at least not too far.

And finally for the pessimist, if you don’t believe that markets will perform over a reasonable time and if indeed that turns out to be true, then, it is even better for your long term wealth provided you are a saver. This is so because, the longer the markets stay low, the more is the money that can be invested in equities and therefore higher will be the wealth whenever the markets finally move. This is important, since nearly everyone in India is a saver!

Happy investing!

Prashant Jain

August 2011


Short term in the markets is always very hard to forecast, readers should note that this note is not commenting on the short term prospects of the markets.

The charts/data presented in this note have been compiled from publicly available information to the best of our ability.

DISCLAIMER: The views expressed by Mr. Prashant Jain, Executive Director & Chief Investment Officer of HDFC Asset Management Company Limited, constitute the author’s views as of this date. It should not be construed as investment advice to any party. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on the author’s views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. The recipient(s) before acting on any information herein should make his/their own investigation and seek appropriate professional advice and shall be fully responsible for the decisions taken.

The RBI today shocked the market by hiking repo rate by an outlier 50 bps taking it to 8% and the reverse repo rate to 7%. Other rates including CRR, SLR were left unchanged. It has kept growth projection at 8% while hiking WPI inflation projection for March 2012to 7% from 6% earlier. M3 growth projection for FY 12 has been reduced from 16% to 15.5% while non-food credit growth projection has been reduced from 19% to 18%

Market expectation had turned benign with respect to RBI policy over the last month or so. This was triggered by heightened global uncertainties (weaker data as well as event specific risks from Eurozone periphery as well as US debt ceiling issues) as well first signs of slowdown domestically (industrial production, purchasing managers’ indices, vehicle sales etc). Importantly, the RBI has acknowledged all these indicators but still chosen to go ahead with an aggressive 50 bps hike. The triggers seem to be as follows:

1. Given the size of the inflation problem as judged by the RBI, it feels the slowdown is not happening sharply enough. Given stretched productive capacities, it seems happy to sacrifice growth further in order to contain inflation (only worried about ‘managing risk of growth falling significantly below trend)

2. It deems the government response to address demand side (presumably fiscal control) and supply side (presumably policy to alleviate bottlenecks) to have been inadequate, and hence has considered a more aggressive monetary policy review.

The guidance for the future is also firmly anchored on inflation trajectory, with the RBI saying that ‘a change in stance will be motivated by signs of a sustainable downturn in inflation’

(courtesy : IDFC MF)

Hello Investors !!

Condolences to all the lives lost in Japan, the land of the rising sun is mauled by the worst earthquake in a century, followed by the tsunami to make things worst, triggering collapse of the nuclear plant, which would expose already battling lives to nuclear radiation. Nature in its revenge mood.

Now shift to the middle east and north africa, you have a jasmine revolution spreading its fragrance of democracy about peacefully in Tunisia and egypt, but now it stinks of blood in Libya , where the ruler is unrelenting enough to liberate his subjects and worse, status of its citizens is now automatically converted from residents to terrorists,

JAPAN disaster is nature’s curse and LIBYA’s disaster is its human curse.

And in these times we have a Cricket World Cup, which is immune to the shocks of JAPAN and LIBYA and people are cheering their teams as if nothing has happened,what an apathy !! the lack of it in full throttle.

These are the days of extreme diversification in nature,people and their attitudes.

So Markets in effect will also show these signs, and display these attitudes about fund flows,valuations and speculation (not investments) .

Normally taking a view in normal times in india is astrology combined with numerology and in such disastrous moments, it is foolishness even with a super moon.

As the headwinds have turned massive tsunami’s and civilizations are at the brink of meltdown.
Excessive exploitation of nature has created an imbalance and led to nature’s fury, and still we continue exploiting !!

Markets can become worst and spread pain to every investor at large, but an investor need not lose heart at this juncture, Human spirit is unrelenting and has stood the test of time and JAPAN is an example in many occasions, they can rise like a phoenix and a rising sun.

They would teach us the new meaning of HOPE,
We need to realign our investment approaches with nature and cull our speculation spirit which is directly proportional to greed and fear.

The analogy of greed and fear in markets are nothing but manifestations of human behavior which has led to innocent lives lost in JAPAN and LIBYA.

Markets would absorb all these emotions and you would see in ample display on monday.

As investors we need to consciously make efforts to conserve nature and invest in those instruments which would benefit the humanity in the long run.

Rather than looking at the P & L, look at the broader picture of sustainable businesses which provide goods and services which are not corrupt to nature or human beings.

This would be the sustainability mantra for humanity.

Wealth created over long periods of time can be wiped out in 30 secs by nature. We need to be a part of nature and align ourselves to nurture and protect as the case of investments into financial products.

We have certain indicative assets which we can correlate, Crude and Gold, Markets would track the movement in Crude very closely, Any downward correction in prices of crude can imply some semblance of peace in Libya and Upward movement in gold can imply of disasters happening and yet to come.

Pray for those in JAPAN and LIBYA, to recover the worst crisis of our times.

Greetings from Wudstreet Investment Services !!!

Budget 2012 had a few positives and surely no major negatives.

Positive aspects of the budget was the low fiscal deficit forecast and the promise of more reforms in the budget session. The budget is pro- consumption and provides additional thrust for infrastructure development. Sectors positively impacted by the budget are Financials, Auto, Agri Inputs, Construction and Infrastructure, while sectors negatively impacted are Cement, Oil and Gas, Travel and Tourisim, Healthcare and Retail.

Post the initial euphoria on the budget, the market would have to negotiaite near term term headwinds like high inflation (rising crude price), rising interest rates, and likely earnings downgrades for FY12. With the more than 10% correction from recent highs, market valuations are now at reasonable levels compared to long-term averages. The relative underperformance of Indian markets in recent times vis a vis the developed markets and other emerging markets also makes our markets less prone to major FII outflows, other things remaining equal. Hence, despite near-term cautious view, we are have a positive outlook on the market from a medium to long-term perspective and would expect outperformnace in the 2H of CY11. The interim period will be provide a good opportunity for long-term investors to accumulate amidst market volailtity and generate decent returns over the next 2-3 years which we expect to be in line with corporate earnings growth @ 16-18%p.a.

Capital goods sector expects the government to selectively raise import barriers for capital equipment, especially power equipment to facilitate domestic players.

Auto sector expects the government to keep excise duty rate unchanged in the Budget. In the previous budget, the excise duty was increased by 2%.

The IT industry expects the extension of the sunset clause on tax exemption for software technology parks under Section 10 A/10 B which is due to expire in March 2011.

Metal sector expects hike in import duty on HR coil from 5% to 10% in the Budget. The metal industry also expects a continued thrust on infrastructure spending in the Budget.

Banking and financial sector anticipates that the government might cut the tenure limit for tax exempt deposits from five years to three years in the Budget.

Markets also expect government subsidy/concessions on interest rates to be provided on lending to State Electricity Boards (SEBs) given their weak financial health.

Another expectation is that of a hike in limit of refinancing from India Infrastructure Finance Company (IIFCL) to commercial bank loans for public-private partnership (PPP) projects in critical sectors from the current Rs 6000 crore.

The cement sector has sought a uniform rate of excise duty on cement as compared to differential rate of excise duty on cement sold above or below maximum retail price (MRP) of Rs 190 per 50 kilogram bag.

The FMCG sector anticipates a continued thrust and higher allocations to social and developmental programs.

The media sector expects a relaxation of foreign direct investment (FDI) norms i.e. an increase in FDI limits from currently 49% in direct to home (DTH) and cable, 26% in news broadcasting & print media and 20% in radio sector.

Source : Capitalmarket.com


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