IBR Macro Newsletter (2013 / Vol8)

B R IE F C OM M E NTS ON R E CE N T N E W S A ND R E S E A R CH

AUG13

BEAR MOOD DEEPENS

No respite in August Only 2 sectors show positive returns in Aug
30-Aug-13 Metal Infotech Healthcare BSE Smallcap Automobiles Oil & Gas BSE Midcap BSE Sensex BSE 500 Power FMCG Realty Consumer Durable Bankex Capital Goods

Markets remained in a bear grip in August, given no sign of any positive. Only 2 sectors gave positive returns, both benefiting from sliding rupee.
Value 7,785 8,028 9,038 5,191 10,202 8,149 5,300 18,620 6,674 1,387 6,342 1,174 5,616 10,304 7,085 1 Day -2.1 1.5 0.8 0.2 0.0 0.7 0.0 1.2 1.0 0.0 1.5 -0.1 1.9 1.6 -0.2 1 Week -0.4 6.4 5.3 -1.1 -0.5 -0.5 -1.1 0.5 -0.2 -0.8 0.8 -4.1 -2.2 -4.5 -2.1 30 Days 3 Months 6 Months 15.2 -8.5 -14.7 7.8 32.4 18.7 0.4 0.7 14.2 -1.1 -12.7 -16.2 -2.0 -8.6 -3.9 -2.5 -5.8 -5.7 -2.8 -17.0 -16.2 -3.6 -5.8 -1.6 -3.9 -10.3 -7.2 -5.9 -21.0 -21.1 -6.4 -6.4 12.0 -7.2 -30.3 -39.2 -9.1 -27.0 -24.1 -11.0 -27.8 -22.2 -12.9 -24.7 -24.1 1 Year -19.6 39.8 21.0 -18.8 10.4 -0.8 -11.7 6.8 0.6 -25.9 18.4 -22.3 -10.0 -10.5 -25.0

Source: S&P BSE Indices, sorted on 30 day returns

As we have said earlier, it is only a few large caps which are holding up the market. Indices like BSE Midcap, or BSE Smallcap are clearly negative; both are down well over 10% over a 12 month basis.

THE SLIDING RUPEE

Hits a low of Rs 68/$ in August Slides 13% in one months August saw the free fall in rupee continuing unabated. Indias currency was 13% lower at the end of August compared to its value at the end of July.

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Aug13

Source: India Business Reports

FIIS NET SELLERS IN AUGUST

Sell around $1bn in August in equities, more in debt FIIs have pulled out $13bn in the last 3 months from equity and debt markets FIIs continued to sell, in both equity and debt markets in August. For the month, they sold Rs 62bn in equities, and Rs 87bn in debt. Now they are net sellers for 3 months in a row. In this period, they have sold Rs 750bn worth of rupees. This is around $13bn.

Source: India Business Reports

Indias current account has been running sharply negative over the last 2 years. The one thing which kept the currency relatively steady was healthy
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Overall, over Apr-Aug, FIIs have pulled our Rs 387bn (~6.5bn)

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capital account inflows, in the form of FII investments + FDI.

Aug13

A reversal of sentiment is proving highly negative for the capital account. FDI decisions will get postponed in this environment, and portfolio money is flowing out. What has happened in the last 3 months is a trickle. April and May had seen good inflows in equities, overall FII investment in equities is positive. It can get worse. FYytd is already substantially negative for debt. Overall, over Apr-Aug, FIIs have pulled our Rs 387bn (~6.5bn)

FY14 GROWTH EXPECTATIONS COME DOWN FURTHER

Now under 5% FY14 GDP estimates coming down Growth expectations are steadily coming down. In July, we wrote how analysts were reviving FY14 growth expectations from 5.5-6% to around 5%. One more month, and we are now looking at expectations of under 5%. For example, check the following table from a Deutsche Bank report:

GDP growth for Q1 FY14 came in at 4.4%. Check this from a report by Jefferies: The internals of the just released 4.4% GDP growth are worrying. Within GDP, there are only two subcomponents growing above the 4.4% mark services and government spend. As such, we are perplexed that an administration implementing severe fiscal discipline has government final consumption expenditure growing at 10.5% yoy in GDP. Consumption growth grinds to a halt Private consumption is not growing, last seen ten years ago We also wrote earlier how consumption is slowing down. The Jefferies report brings out this point in a nice chart:

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As the chart shows, private consumption is now at decadal lows, and has fallen below 2%. Private consumption is the main growth engine of the Indian economy. If this is below 2%, government needs to cut expenses to contain fiscal deficit, no one is investing, CAD is a large negative number: then pray, where will GDP growth come from? Traffic isnt growing either Road traffic did not grow in FY13 it seems A report by IIFL shows that traffic growth is slowing down. In FY13, traffic growth was only 1% according to IIFL, as compared to 3% in FY12. This isnt reassuring, as it raises questions about whether the GDP grew even 5% in FY13. The bottomline: GDP growth is likely to come down further as the FY14 pulls along. Expect more like a 4% number this year.

LIQUIDITY TIGHTENS
Short term rates rose sharply in August Money markets are in a squeeze due to several factors. Falling rupee has made RBI jittery about ability of corporates to service debt. The sharp fall in rupee is going to hurt a lot of corporate: those with forex loans, or the wrong hedge etc. Banks are going to clamp down on disbursals to a lot of corporate. Plus, the fiscal deficit situation is going to get a lot worse: tax collections will not grow this year, and subsidy bill is shooting up. The government will suck out whatever liquidity is there in the system. That affect started showing up dramatically in Augst

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Source: Morgan Stanley Research

Banking stocks hit Short term rates shot up to close to 12% in August. This is the key reason banks have fallen sharply. The spike in rates will hit their treasury income, and also bring mark-to-market losses. Estimates for mtm losses are between Rs50bn to Rs 100bn. That is a big sum, which can hit bank balance sheets sharply. While much of that is an paper loss at the moment, but banks are jittery now, since there no telling how long will tight liquidity last. Also, expectations on monetary cycle are changing fast. Instead of the expected cuts in rates going forward, now market is talking about increase in repo rates to defend the currency. This is further bad news for banks.

RUPEE AND CAD WILL DRIVE THE AGENDA IN FY14

The sharp fall in the rupee has ensured that any remaining sheen is off from the India story. Growth has not been there for around 2 years, and it is not likely to return in a hurry. The government has very few silver bullets left, and with elections not far away, it will not take any big decisions, like a more liberal FDI regime. Expectations on rate cycle have reversed. Market no longer expects rate cuts, since RBI will focus on defending rupee. Also, governments borrowing appetite will any push rates higher. As a report by Ambit points out:
Our discussions with policy experts late last week suggest that the new RBI Governor (who assumes office this week) is likely to focus on defending the currency and inflation control whilst defocusing on growth. This in turn leads us to change our initial expectation of a 25bps repo rate cuts in 4QFY14 to repo rate increases of 50-75bps (although the distorted form of intervention that the RBI has been pursuing since mid-July might be rolled back). Furthermore, given that senior fiscal experts in Delhi are confident that the Finance Minister is likely to deliver on his stated fiscal deficit target of 4.8% of GDP despite the passage of the Food Security Bill; means that Government expenditure growth is likely to taper off in 2HFY14.

FY14 will be a tough year for business, In a nutshell, the remaining FY14 is likely to see:
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but great for long term investors

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Weak GDP growth Return of rising interest rates Revival of inflation due to sharp drop in rupee Weak equity markets

Aug13

In this scenario, investors should stay in FDs or mutual funds with short term focus. There is great value in equities now, but only for those who have a 3year+ holding horizon. Continue to stay away from high D/E companies, or where promoter holding is pledged.

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Aug13

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