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Jun 20, 2016


Mr. Market is a manic depressive with huge mood swings, and you should bet against him, not with him, particularly when he is raving. – Barton Biggs

With full and due respect to Gov. Rajan, one lesson we have learnt in 25 years of corporate life and markets is that no one is indispensable. Not Bill Clinton, not Alan Greenspan, not Volcker. Life goes on. That possibly applies today.

We remain in the camp that short term volatility should be used to add to high quality stocks with track records dating B.R (before Rajan). Great businesses at reasonable prices and not vice versa. Businesses succeeded during UPA, they will succeed P.R. (Post Rajan).

On Fixed Income, we would continue to avoid the longer end of the curve. We would expect bonds to reflect uncertainty risk, heightened global risk, policy risk, inflationary risk, and we would expect hot money FIs to sell bonds if the currency shows signs of weakness. FI debt investors have less room to work with than equity investors, and are more attuned to potentialinflation; the loss of Rajan is likely to weigh heavier on debt investor’s calculations.

Complacency & Event Risk Revisited

The news was not entirely a surprise. In our previous commentary on June 6th, we stated that complacency rules the markets, we are entering a summer of event risks, the rally is weakening, modifying risk profiles made sense, and raising cash for deployment and waiting on deploying capital. (click to read “Complacency, Event Risk & Bull Markets”,June 6th, 2016, Nifty 50 8220.80

We just got event risk over the weekend.

Macro risks have skyrocketed with the prospect of weaker monetary management, weaker monetary policy, a weaker local currency, unjustified easier monetary policy and potential inflation risks.

P.M. Modi’s team is doing great work. We remain hopeful of a competent replacement. Beyond that, as the macros become riskier, active stock picking, competent active management and absolute return strategies will continue to outperform

Motor Vehicle Sales Continued Their Strong Performance, Up +9.9% Y/Y… …Utility Vehicles Were Up +35.9% Y/Y, and Commercial Vehicles Up +16.9% Y/Y…

Motor Vehicle Sales Continued Their Strong Performance

Auto Sales continued to expand for an 8th straight month, with healthy urban demand

Sales of passenger vehicles in May grew 6.26% from a year earlier for the eleventh straight month. Sales of UVs surged 36%, while car sales declined 0.86%. Demand is being driven by the urban consumer, government infra spending and a normal monsoon could help revive consumer demand in rural India. Sales of commercial vehicles rose nearly 17%.

India Almost A Surplus Current Account Nation in Q4 & Net FDI Up 15.3% for FY16

The Current Account Deficit (CAD) for the March quarter came in at 0.1% of GDP, a 36 quarter low at $318 million, compared to $7.1 billion in the preceding quarter. The CAD is the difference between inflows and outflows of foreign exchange. It improved on the back of increased FDI and a contraction in the trade deficit due to lower oil prices and a drop in gold imports.

The trade deficit for the quarter shrank to $24.8 billion from $34 billion in the preceding quarter, driven by an improvement in demand for non-oil exports.

Net FDI inflow rose 15.3% in 2015-16 over the previous year. Portfolio investments recorded a net outflow of $1.5 billion in the quarter primarily reflecting net outflows in debt.

India’s Current Account Deficit Narrowed to $318 Million Vs. $7.1 Billion in Preceding Qtr… …While Net FDI Rose 15.3%

Net FDI inflow rose 15.3% in 2015-16

A step closer on GST implementation

The Goods and Services Tax (GST) appears set to be implemented sooner than expected. Post approval of parliament with two thirds majority the draft bill needs to be approved by a majority of the state legislatures before receiving presidential accord.

GST could be a boon for controlling inflation.

Healthy growth in Tax collections in FY 17

Direct tax collections have risen by 18% to Rs 434 billion during the first two months of the current fiscal. Indirect tax growth is up 36.7% for April-May FY17.

With the help of electronic surveillance, the government has added 50 lakh new tax payers, or a 14% increase on the existing tax base, which led to a collection of Rs 7,000 crore in taxes in the past two years.

Voluntary Tax Amnesty Scheme

A new ‘Voluntary Scheme’ to disclose unaccounted assets of wealthy was unveiled on June1st 2016. Unlike earlier ones, the ongoing scheme stipulates a 45% tax and penalty to get amnesty from further scrutiny. In the last such scheme in 1997, amounts disclosed were equivalent to 2% of GDP.

The current scheme comes after a gap of two decades. In this time, real estate prices and gold imports have sky rocketed. Were we to assume a similar 2% of GDP, that would add INR 1.35 trillion to systemic liquidity and about INR 600 billion in revenue to the exchequer.

Meanwhile, PMI Surveys Weakened Marginally

Manufacturing output grew at its slowest pace in five months in May. The seasonally adjusted purchasing managers index edged higher, posting 50.7 compared with 50.5 in April, and one of the lowest readings since 2013 end. Export orders fell for the first time in 32 months.

Service sector output decelerated to its slowest pace of growth in six months in May. The services business activity index fell to 51 from 53.7 in April. Although service providers remain optimistic that output will expand in the year ahead, the level of confidence was the lowest recorded since February.

The Composite PMI Output Index fell to a six-month low of 50.9 from 52.8 in the previous month.

The weakness in PMI data is cause for some concern.

Fixed Income

Rajan Decision Adds Uncertainty

Debt investors hate uncertainty. Particularly uncertainty when it comes to emerging markets. Inflation and capital loss are mortal enemies.

The government’s handling of this situation will be looked back as Vodafone all over or worse. Regime change means policy change, which likely means easier monetary policy and a pickup in inflation.

Inflation alongside a weakening of the currency are going to worry overseas investors and we’re likely to see outflows.

One of the pillars of the Rajan regime was a stable exchange rate. Modi wooed investors and Rajan provided credibility.

Yet again, emerging markets like India have sent foreigners the message that it’s still business as usual. That’s a very bad message to send if you’re looking for FDI and FI flows.

The fixed income environment has gotten murkier, riskier and inflation will possibly rear it’s ugly head again.

That is particularly dangerous because expectations play such a crucial role in actual inflation.

Fortunately, the government’s finances are strong and the RBI’s balance sheet is healthy.


The Nifty Index was range bound for the last three weeks.

The critical Fibonacci level of 61.8% retracement of the whole decline seen from high of 9119 in Mar’15 to low of 6825 in Feb’16 comes at 8243 levels.

Index made a peek above it, but failed to cross it on weekly basis. The high made in October’15 of 8336 is another resistance on the upside.

Also highest open interest for Calls is seen at 8300 strike which will suggests market has stiff resistance in the region of 8243-8336 levels.

Crossing these hurdles would see a rally towards 8500 and then 8630 levels. On the downside the 8000 Put has the highest open interest which will act as support for the market.

Also technical supports are seen at coming around 7950-7900 levels. Hence market has good support in the zone of 8000-7900, breaking below this will be negative and see selling pressure towards 7700 levels.


The Fed Is Closer to Capitulating Than Ever

Well, it’s never good news to hear the emperor has no clothes on, which was essentially the underlying message from Yellen’s testimony.

In this case, it’s a welcome respite for global markets to hear the Fed Chair hem and haw her way through and essentially indicate the Fed is market driven and not the other way around. The collective in this case is wiser than the solitary. We think that’s good news because the alternative – rate hikes – could have been calamitous.

The Fed cited the dismal May jobs report, tepid consumer spending and business investment, a slowdown in worker productivity, stresses accruing from China and Brexit.

Fewer Fed Members Expect to Raise Rates

Fewer Fed Members Expect to Raise Rates

A Welcome 7%~ Drop In Crude Oil

West Texas Intermediate crude dropped by ~7% to $47 a barrel the past week, its steepest loss in more than two months, on broad based risk aversion combined with comments of Russian Oil Minister “There’s no need for Russia and Saudi Arabia to cooperate on influencing crude markets now and low prices may persist for 10 to 15 years“, in an interview.

Good news for India.

BoJ’s Hold’s On Stimulus – No Helicopter money

The Bank of Japan refrained from offering additional monetary stimulus despite anaemic inflation and weak global growth, sending the yen racing to a two-year high. Bad news for Japan but good news for world markets that are increasingly sceptical of negative rates and QE. The central bank maintained its massive asset buying program, and also left current negative interest rates unchanged.

Further, Mr. Kuroda poured cold water on the theoretical option of so- called helicopter money, where the central bank directly funds government spending. He said the law does not currently allow for such unorthodox action from the BoJ.

Good news for world markets.


Honestly, who cares about BREXIT in India when we have REXIT. The table on the next page has that global revenues for the top 200 Indian companies at roughly 22%. We would guess that Europe would be less than a third of that, or India’s exposure to Europe is around 7%. Not exactly the end of the world.

While Mr. Rajan’s departure is a definite negative, much depends on his replacement. We were fans of the stability and sensibility that he brought to bear on monetary policy in India.

The government has dug itself into a hole and taken a gamble by not pursuing a second term.

It would be premature to take a view on this matter without learning about Mr. Rajan’s successor. We hope the BJP will find a competent replacement. Either way, many companies have delivered fantastic returns for investors over the past 2 decades.

We continue to be in the camp that Brexit, Rexit, Fed, BoJ continue to be distractions that have secondary or tertiary impacts on wealth creation. Sell-offs should be used to add to Equities at reasonable prices. Many companies demonstrated profitability through Congress, NDA, and BJP. People will continue to buy goods and services from the ablest provider.

So REXIT is done. Brexit will be done. Neither represents a rational reason to abandon a rational long term investment plan.

Share of Foreign Sales By Industry For Top 200 Firms

Share of Foreign Sales By Industry For Top 200 Firms