David Fuller and Eoin Treacy's Comment of the Day
Category - India

    Constructive on structural and cyclical growth outlook

    Thanks to a subscriber for this report for Deutsche Bank highlighting some of the achievements India has made in improving governance. Here is a section:

     

    While the long term structural macro outlook remains unambiguously positive, we think India is also poised for a cyclical upturn in growth, and that the worst of the growth-slowdown, caused by temporary disruption and technical factors related to external trade, is behind us. The economy has already started to stabilize post GST and high frequency indicators are showing a rebound, which should eventually reflect a recovery in July-Sep’17 GDP growth (DB estimate 6.4%). While we expect growth to average around 6.6% during FY18, we are more optimistic about the outlook for FY19 and beyond.

    We also note that growth momentum generally improves in the year prior to the elections (India’s next general elections are to be held in May 2019 or earlier), which is likely to play out in this cycle as well. We think given the various reforms that are operational at this stage and that have been implemented by this government so far, it is reasonable to expect growth to return close to 8.0% by FY20, absent any external shock that could jeopardize this baseline outlook.

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    Asia Local Markets Weekly - Slippery slope

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section:

    Away from the debate on whether the recapitalization bonds will – and should – be treated as an ‘above the line’ item in the Budget or not, and hence the optics on the Budget Deficit;

    the issuance of such a large quantum over a period of 12 months will pressurize an already weak technical position for the bond markets by detracting from the public sector bank appetite for general government issuance (center and state). The specifics of the recap bonds (whether eligible for SLR, whether marketable etc.) will determine the extent of substitutability between recap bonds and other government paper. Note also the backdrop of recent lowering by RBI of both the mandatory SLR for banks, and the limit on SLR securities held under the HTM category, which should reduce the overall appetite from banks for SLR paper – and in particular for duration. There are two mitigating factors to consider though – a) that the banking system remains flush with liquidity (as obvious in the money parked with RBI) created by the demonetization exercise from late last year, and b) possible reduction in RBI OMO sales given that this recap bond issuance will, at least temporarily, take some surplus liquidity out of circulation. The net sum though, we expect, to still be negative for the demand technicals of the markets. Comes as this does together with increasing likelihood of slippage in deficit for the current FY (unless the government manages to get additional dividends from PSUs) – and likely putting at risk the FRBM Committee recommendation for 3% target for next FY – the technical picture overall points to risk of higher rates and steeper curves still in India. We stay underweight in our exposure to duration.

     

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    Finally the Indian TARP

    Thanks to a subscriber for this report from Morgan Stanley which may be of interest to subscribers. Here is a section:

    We expect the stocks to trade above their historical averages on P/BV given cleaned-up balance sheets and lack of foreign ownership. Hence, we assign core F19e multiples of 1.1x for SBI and BOB and 1x for PNB . This compares to the three-phase residual income model approach we previously used to value corporate banks. The table below summarizes our key assumptions for these banks: cost of equity (no change), sustainable RoE (no prior assumptions because we used RI models),and long-term growth (no prior assumptions because we used RI models). We leave the valuations of non-bank entities and cost of equity unchanged. This drives the price target and scenario value changes at these banks. We double upgrade SBI and PNB to OW. We upgrade BoB to EW. 

    Both ICICI Bank and Axis have been affected by continued NPLformation and inability to get ahead of the problems. These banks are not the direct beneficiaries of the government's move. However, they should benefit in two ways: 

    1. With SOE banks properly capitalised, they can finally see proper clearing of NPLs in the system.

    2. This makes it easier for the RBI to implement IND-AS in F19 as SOE banks will not be constrained by capital from taking the necessary hits. The implementation will allow private lenders to recognise losses in the transition period, raise capital (if needed),and potentially move to normalised provisioning from F19 itself.

     

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    Markets, Moody's Applaud $32 Billion Bazooka for India Banks

    This article by Anto Antony for Bloomberg may be of interest to subscribers. Here is a section:  

    India’s government has won a resounding reception from investors and credit-rating firms for its unprecedented pledge of 2.11 trillion rupees ($32 billion) in capital for the country’s beleaguered state banks.

    The move, which drove an index of government-run banks up as much as 26 percent, is part of Prime Minister Narendra Modi’s goal to help lenders meet tighter capital-reserve requirements, as slower economic growth and falling demand erode borrowers’ ability to repay loans. Soured debt is now the highest since 2000, hampering credit expansion that’s needed to spur Asia’s third-largest economy.

    “The proposed infusion is a sizable jump over what had been pledged before as India is seeking to plug a large part of the core equity gap at the state-run banks,” said Jobin Jacob, a Mumbai-based associate director at Fitch Ratings Ltd. This addresses “weak core capitalization, one of the key drivers for our negative outlook on the South Asian nation’s banking sector.”

    Moody’s Investors Service analyst Srikanth Vadlamani said the move is a “significant credit positive” for India’s state- run banks. The amount of capital pledged is enough to address the lenders’ solvency challenges and recapitalize them adequately, Vadlamani, who is vice president of the financial institutions group at the unit of Moody’s Corp., said by phone.

     

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    India's Digital Leap - The MultiTrillion Dollar Opportunity

    Thanks to a subscriber for this highly educative heavyweight 124-page report from Morgan Stanley which may be of interest. Here is a section:

    Digitization is that idea in India, right now. The government and the Central Bank are on a mission to rapidly formalize and financialize the Indian economy. India has introduced a universal biometric identification system (Aadhaar), initiated measures to boost financial inclusion (Jan Dhan), moved to a new fully online value-added goods and services tax system and implemented real-time payment systems (Unified Payments Interface and Bharat QR). Coupled with rising smartphone penetration, likely doubling from 300 million to nearly 700 million by 2020, these changes are driving India's digitization. We expect a step change in India's per capita income, banking system and stock market performance over the coming years. The channels of change include more financial penetration,
    greater tax compliance and increased credit to micro enterprises and consumers.

    The result could be a multi-trillion dollar investment opportunity. Aside from the near-term teething issues involved in execution of such big changes and other cyclical problems faced by the economy, there is scope for visible shifts in economic activity starting in 2018 eventually leading to India being a) the third-largest economy in the world with a GDP of US$6 trillion, b) among the top five equity markets in the world with a market capitalization of US$6.1 trillion and c) the country with the third-largest listed financial services sector in the world with a market cap of US$1.8 trillion by 2027. We also expect India's consumer sectors to add about US$1.5 trillion to their current market cap of US$500 billion over this period.

    There are implications beyond India. The concomitant increase in e-commerce, consumption basket, financial products and investments will make India a significant market for global corporations. Most importantly, if India succeeds, it will become the template for other emerging nations. While increasing financial inclusion has been the policy objective across emerging nations, India can provide leadership with its unique model. Hence, it is very important for corporates, investors and policymakers across the globe to observe and understand these developments in India. Indeed, there may be lessons for developed countries too.  

     

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    2017 at the Three Quarter Pole

    Thanks to a subscriber for securing an invitation for me to attend Jeff Gundlach’s presentation yesterday which as always was an educative experience. 

    Superpower India to Replace China as Growth Engine

    This article by Michael Heath for Bloomberg may be of interest to subscribers. Here is a section:

    ``India will account for more than half of the increase in Asia’s workforce in the coming decade, but this isn’t just a story of more workers: these new workers will be much better trained and educated than the existing Indian workforce,’’ said Anis Chakravarty, economist at Deloitte India. ``There will be rising economic potential coming alongside that, thanks to an increased share of women in the workforce, as well as an increased ability and interest in working for longer. The consequences for businesses are huge.’’

    While the looming ‘Indian summer’ will last decades, it isn’t the only Asian economy set to surge. Indonesia and the Philippines also have relatively young populations, suggesting they’ll experience similar growth, says Deloitte. But the rise of India isn’t set in stone: if the right frameworks are not in place to sustain and promote growth, the burgeoning population could be faced with unemployment and become ripe for social unrest.

     

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    The Internet's Next Big User Group

    This video from the Wall Street Journal may be of interest to subscribers. 

    Asia - Enjoying external support

    Thanks to a subscriber for this note from Standard Chartered which may be of interest to subscribers. Here is a section:

    Asia is enjoying better growth so far this year versus 2016. Of the 11 countries we track in Figure 1, seven registered faster growth in 2017 (based either on Q1 or H1 GDP data). China leads the pack, growing 6.9% in H1 – we now think China may register faster growth in 2017 than 2016; this would be the first time that annual growth has not slowed since 2010. Of the three economies that underperformed versus 2016, India was due to demonetisation, the Philippines was slower versus a high base and Korea’s Q2-2016 growth was boosted by budget front-loading.   

    The region is benefiting from a pick-up in external demand. All the economies we track above are enjoying faster export growth. As a whole (excluding China, Indonesia and Vietnam), exports rose 13% y/y in 5M-2017. A caveat is that 32% of the increase went to China. This is reflected in the export broadness index above, which shows a relatively narrow export destination profile for the region so far this year. We expect Asia’s export performance to ease in H2 on the back of growth moderation in China and less favourable price base effects.  
    Comparatively, domestic economic activity appears more divergent across the region. Credit growth remains soft in several economies, reflecting still-cautious domestic sentiment. Government-led infrastructure in places such as Indonesia and Thailand will be needed to mitigate soft private investment. 

     

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    Market Darling India Has Issues as Inflation Hits Record Low

    This article by Anirban Nag and Archana Chaudhary for Bloomberg may be of interest to subscribers. Here is a section: 

    While bond markets are rallying as investors wager the data will trigger a rate cut from the Reserve Bank of India, the figures signal the economy faces hurdles even as the stock market surges to a record, the rupee rallies and the world’s major economies head into an era of higher borrowing costs.
    There’s a realistic chance of a 25-basis point rate reduction in August, Indranil Pan, chief economist at IDFC Bank Ltd., said. “It could be a very close call as the RBI is expected to remain cautious of the international rhetoric of tighter monetary policy and unwinding of quantitative easing," Pan said in a note.

    Some of the pessimism stems from the fact that is India is still recovering from a cash ban that interrupted employment for millions, forced farmers into fire sales of agricultural produce and bogged down the manufacturing sector. The introduction of a goods and services tax on July 1 only added to the confusion while a glut of bad loans means businesses are not borrowing to invest in Asia’s third-largest economy.

    Bank credit to industry contracted in the year to May, while deposits surged following the ban of high-denomination notes in November, leaving the banking system grappling with surplus cash.

    Data on Wednesday showed headline consumer price inflation fell to 1.5 percent in the year to June from an annual 2.2 percent a month ago and below forecasts for a 1.6 percent reading. That’s below the RBI’s medium term target of 4 percent and through the bottom of its 2 percent projection for the first-half. Core inflation, which strips out volatile food and fuel items, also slipped below 4 percent.

     

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