Invest Without Emotions
Source: India’s Investment Slowdown: The High Cost of Economic Policy Uncertainty
Flash numbers came out yesterday, here’s a roundup.
Markit Flash U.S. Manufacturing Purchasing Managers’ Index registered 55.5 in March, the second-highest since January 2013.
The flash estimate of the Markit Eurozone PMI Composite Output Index came in at 53.2, only slightly lower than February’s 32-month high of 53.3 and registering expansion for the ninth consecutive month. The periphery is staging a robust-looking recovery.
New export work placed at manufacturers rose for an eighth month running, with China, Spain and the US mentioned as sources of growth.
The Markit Flash France Composite Output Index posted 51.6, up from 47.9 in February. That was the first reading above the 50.0 no-change threshold since last October.
In the manufacturing sector, growth of new work picked up to a solid pace that was the sharpest in 34 months (partly boosted by a faster rise in new export orders).
Eurozone unemployment remains stuck at a record high of 12%. Price measures continue to warn of deflation risk. Input prices – or the prices manufacturers pay for goods – have been dropping while output prices – or the prices they charge for what they sell – are contracting, as they have done for the past two years. (WSJ)
Investors are walking farther along the risk curve, reaching for yield. Debt investors are abandoning normal creditor protections on European leveraged buyout loans. Growing volumes of euro-denominated “covenant light” loans have now aroused the interest of European regulators, who are increasing their monitoring of lenders’ behaviour. (FT)
Germany is seeing its version of a real-estate boom, dubbed betongold or “concrete gold.” “People here don’t want to own property. But they now feel they must because there’s no interest on savings. All you can do is buy real or concrete gold.” (FT)
Source: Markit
Raghuram Rajan, after having said “If you do a Volcker, you kill the supply side, and then you are in a bad situation,” seems to be itching to do a mini-Volcker.
On his arrival at the RBI, Rajan established a Trojan horse in the shape of an expert committee tasked to advise whether the central bank’s somewhat elastic growth-inflation mandate should be changed to a narrow inflation target.
The Urjit Committee came back with a recommendation that the RBI should aim to reduce headline consumer price inflation to 8% within a year, 6% within two years and 4% (+/- 2pp) thereafter.
This chart from a recent Credit Suisse report show how ridiculously difficult this is going to be:
The problem is that India is a convoluted policy mess. Food & energy account for 57% of the total CPI. We have a Minimum Support Prices (MSP) for food that have a greater impact on food & energy inflation than repo rates.
More from the Credit Suisse report:
Supply-side shocks (e.g. unusual weather patterns) and government policies are often more important drivers to the extent they impact food prices in particular. According to our analysis, if, for example, the government were to lift minimum support prices for key foodstuffs by an average of 20% at the beginning of the 2014/15 fiscal year, rather than another 6% as in 2013/14, this would more than offset the disinflationary effect of a 100bp repo rate hike.
The brain-trust at Credit Suisse expect three more 25bps repo rate hikes by the end of the 2014/15 fiscal year. If this were to occur, what would become of the banks? From FT:
If one makes sane assumptions regarding what % of the currently stressed assets of the banking system will have to written off and if one factors in incremental Basel III capital requirements over and above that, Indian banks need around US$40bn to regain Balance Sheet strength. That amounts to 2% of GDP.
Inflation targeting, without fiscal reform, and without considering the fate of banks and lacking any progress on labor reforms will brew a potentially toxic stew. Good luck to whoever wins the elections.
Last year has been a wonderful year to go elephant hunting. Banks were hurting and buried under bad debt, FIIs were selling Indian debt on the back of a collapsing Rupee, this pretty much made domestic bond funds the lender of last resort. Supply, combined with the fact that commissions on selling debt funds are way more lucrative than those on equity, lead to a DII (Domestic Institutional Investor) debt binge.
FIIs were in full on panic mode in June, July and August last year. But haven’t really participated in the equity markets this year.
After being short net short in December and Jan, are we seeing a change of heart?
FII participation remains low. Waiting for elections?
Equity mutual funds’ actions over the last 4 months:
Note:
China’s Flash Manufacturing PMI numbers for January came out yesterday and sent markets tumbling across Asia and America. The Dow ended down -1.07%, S&P -0.89%, European markets down about -1%. The Nikkei has opened down -1.45%.
Knee-jerk reactions aside, the PMI print is exactly what a re-balancing Chinese economy would produce. One of the items in their third plenum reform plan was to transition to an economy less dependent on massive government investment and more driven by consumption, innovation and market forces.
As far as the India story goes, China is the biggest consumer of commodities in the world. Its hunger for raw materials put into motion the “commodity super-cycle.” Until China came into the picture, commodities, as an asset class, was out of favor. The prices of most commodities are capped by the price at which a suitable substitute is available. For example, when aluminium prices shot up, aircraft and car manufacturers responded by switching to carbon-fiber. It was Chinese demand that put commodity prices into a different orbit.
As commodity prices correct, the pressure on the Indian current account will ease. This, combined with the recovering US and European economies will prove to be a tail-wind for the Indian services sector.
Irrespective of where the market opens today, in the long-term, a Chinese economy that is less reliant on investment driven growth is a net positive to India.
Source: Markit
