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

    Rupee Advances to 8-Week High After Modi Budget

    This article by Subhadip Sircar for Bloomberg may be of interest to subscribers. Here it is in full:

    Rupee rose to strongest in 8 weeks as PM Modi stuck to fiscal prudence in budget presented Wednesday, Fed signaled it wasn’t in a hurry to raise U.S. rates.

    USD/INR falls 0.2% to 67.3725, lowest since Dec. 8; seventh day of losses is longest losing streak since Dec. 8

    Positive stock sentiment in response to budget may keep INR bears at bay for now, Citibank says in note. Medium-term trend remains dependent on broader USD trend, global risk sentiment, oil prices

    Tailwinds from declining oil prices, widening real rates now dissipating, issues of competitiveness may soon arise. Stays tactically neutral INR, no longer bullish for medium term

    Buy rupee as India budget shows fiscal prudence, Scotiabank says

    Contained budget gap to give RBI room to cut rates, S&P Global Ratings says Govt endeavor is to improve on FY18 fiscal gap est., 

    Economic Affairs Secretary Das says Expect bond yields to remain range bound over the next 5-6 weeks on positive investment demand from banks, CPI expected to stay sub-4% in Jan./Feb. and supply lull in February and March, says Morgan Stanley in note dated Monday
    Expectations for RBI rate cut at the Feb. 8 monetary policy meeting Yield on govt bond due Sept. 2026 drops 3bp to 6.40%

     

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    Email of the day on India's demonetisation

    Thank you for another very well done video commentary. I think it was excellent. When you or any one from the collective have time, could you please share their/your views on the effect of India's move to change their currency bills. Thanks in advance

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    The Marketscope

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

    Global headwinds and domestic uncertainties prevail in Nov’16
    November’16 was a perfect storm for India, as rising US bond yields, a strengthening USD, and EM risk aversion, coupled with an unprecedented demonetization drive in India, led to a significant decline in Indian assets. MSCI India was down 5.3% during the month – underperforming MSCI EM/Asia by ~300bps. While equity markets underperformed MSCI EM/Asia for a fourth month, INR performed better than many EM currencies. INR depreciated by 2.4% in the month while other EM currencies such as TRY, MXN, BRL, and IDR depreciated by 4%-10%.

    Sectors relatively immune to demonetization were clear outperformers 
    The sectoral performance during the month was clearly driven by the market’s assessment of the likely impact of the demonetization drive. Sectors with a global orientation or that saw significant cash inflows after demonetization were outperformers. Accordingly, BSE Metals, BSE Power, BSE IT, BSE Oil & Gas and BSE Healthcare were the outperforming sectors. On the other hand, given the disruptive ramifications of demonetization for (i) consumption sentiment, (ii) the operations of businesses with a meaningful reliance on cash transactions, (iii) the wealth effect and (iv) expectations of further follow-up action on unaccounted wealth, BSE Realty, BSE Consumer Durables and BSE Auto were the biggest underperforming sectors, with the respective indices declining by 18%/13%/9% during the month. 

    Tale of two investors: 8-year-high selling by FIIs matched by record DII buying 
    The flows of domestic and foreign investors touched multi-year records, albeit in different directions. Driven by hardening US bond yields and generic risk aversion towards EMs, foreign institutional investors [FIIs] were net sellers of Indian equities at US$2.6bn – the highest monthly outflows since the global financial crisis eight years ago. However, sharp FII outflows were matched by equally robust inflows from domestic institutional investors [DIIs], which net bought US$2.7bn – the highest since at least 2007 and most likely the highest ever monthly inflows. The sharp surge in DII inflows could be attributable to (i) strong inflows into mutual funds in the preceding months, (ii) a likely continuation of strong inflows into MFs in Nov’16, (iii) lower valuations for stocks hit by demonetization, (iv) a sharp surge in buying by insurance companies (at US$687mn) after eight months of net outflows/anemic inflows.

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    Fearing tighter U.S. visa regime, Indian IT firms rush to hire, acquire

    This article by Sankalp Phartiyal and Euan Rocha for Reuters may be of interest to subscribers. Here is a section: 

    Indian companies including Tata Consultancy Services (TCS), Infosys and Wipro have long used H1-B skilled worker visas to fly computer engineers to the U.S., their largest overseas market, temporarily to service clients.

    Staff from those three companies accounted for around 86,000 new H1-B workers in 2005-14. The U.S. currently issues close to that number of H1-B visas each year.

    President-elect Trump's campaign rhetoric, and his pick for Attorney General of Senator Jeff Sessions, a long-time critic of the visa program, have many expecting a tighter regime.

    "The world over, there's a lot of protectionism coming in and push back on immigration. Unfortunately, people are confusing immigration with a high-skilled temporary workforce, because we are really a temporary workforce," said Pravin Rao, chief operating officer at Infosys, India's second-largest information technology firm.

     

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    Emails of the day on India's new currency notes

    Rupees: for the sake of clarity following your comments of the 9th and today, please note that the R1000 is being replaced by the new R2000. The net effect, therefore, is to increase the circulation of high-value notes. So far as gold is concerned, now that so many people have learnt that fiat money can be made valueless at a stroke, the attraction of keeping some money in precious metals has increased. (I am visiting India and have found it salutary to have a practical lesson in what I had always understood theoretically.) My guess is that the recent decline in gold follows expectations of rising interest rates.

    And

    Any follow-up to your article discussing the demonetisation of India's 500 and 1,000 rupee notes? The Bombay Bank Index initially shot up but has retraced all of the move. Chaos seems to have ensued, but would like to hear from the community

     

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    India scraps 500 and 1,000 rupee bank notes overnight

    Thanks to a subscriber for this article from BBC news which may be of interest. Here is a section:

    The surprise move, announced on Tuesday evening, is part of a crackdown on corruption and illegal cash holdings.

    Banks will be closed on Wednesday and ATM machines will not be working.

    India is overwhelmingly a cash economy. New 500 and 2,000 rupee denomination notes will be issued to replace those removed from circulation.

    "Black money and corruption are the biggest obstacles in eradicating poverty," Mr Modi said.
    People will be able to exchange their old notes for new ones at banks over the next 50 days but they will no longer be legal tender.

    The announcement prompted people across the country to rush to ATMs that offer 100 rupee notes in an attempt not to be left without cash over the next few days.

     

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    Time for an Upgrade

    Thanks to a subscriber for this report from Deutsche Bank focusing on the India utilities sector: 

    Why retirement? Substantial savings for state utilities, better efficiency
    India is planning a retirement policy to dispose of 18% of India’s coal-fired old capacity (36GW) over 5-6 years, starting with 6GW (2.2%) by Mar’17. Stringent new pollution norms and a coal linkage transfer policy have been instigated to hasten the retirement. Retirement will lower coal consumption by ~30% and will also cut pollution and reduce the tariff burden for state utilities.

    Replacement is warranted and pressing
    The states’ role in power generation is declining and will trigger a new capex cycle, for energy security. Additionally, with shut-downs we estimate annual requirement of 19-22GW projects to avoid power shortages. Government (CEA) estimates corroborate the requirement of 24GW annually. Rising PLFs should exceed the 2008 peak by FY19-20e, necessitating further investments now – as the power project cycle is six years from concept to commissioning.

    Stage-I Capacity utilisation recovery to benefit utilities (Prefer NTPC)
    With higher retirement and lower supply addition (just a 2% CAGR over FY17-22E) – we believe capacity utilisation rates are likely to stage a strong recovery. We raise PLF estimates for utilities by 2-3pps beginning FY18E. With 37% volume growth over four years and valuations still at a c20% discount to the historical average, the sector looks attractive.

     

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    Rupee Jumps to 4-Month High as Patel Begins Innings as RBI Chief

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

    Indian sovereign bonds also advanced on Tuesday. Urjit Patel assumed charge as the Reserve Bank of India’s 24th governor on Sept. 4, succeeding Raghuram Rajan. Patel’s first test will come Oct. 4 -- a scheduled monetary policy review -- where investors will gauge if governorship reduces his traditional reticence.

    “An interest-rate increase by the Fed is unlikely,” said Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank Ltd. “Inflows into stocks remain strong and that’s supporting the rupee.”

    The rupee climbed 0.5 percent to 66.5250 a dollar at the close in Mumbai, according to prices from local banks compiled by Bloomberg. It rose to 66.49 earlier, the strongest level since May 9. Tuesday’s gain reduced the currency’s 2016 loss to 0.6 percent, Asia’s worst performance after China’s yuan. RBL Bank expects the rupee to appreciate to 66.40 a dollar in the near term should equity flows sustain their momentum, Lasrado said.

    “We don’t expect a change in the RBI’s foreign-exchange management under the new leadership,” he said. “They will love to buy dollars at dips and refrain from intervening should the rupee weaken in line with Asian fundamentals.”

     

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    Global Equity Strategy Who sells where in 2016

    Thanks to a subscriber for this heavyweight 118-page report from HSBC covering the international exposure of major companies on a global basis. Here is a section:

     

    European equity markets are by far the most global, more than their economies, and are most exposed to Emerging Markets (EM)

    US equity market is the most closed of the Developed Markets (DM), a key ingredient to the US’s relative ‘safer-haven’ status

    Japanese overseas revenues have grown sharply in recent years, but are now threatened by yen strength

    EM stock markets are the most closed, accounting for the bottom seven countries in our ranking
    Economies are not stock markets. DM and EM have similar exports/GDP levels, but DM stock markets are twice as global

    Chinese corporates going abroad, but only generate 10% overseas today. Brazil corporates only 20% overseas after commodity slump 

    Italy and India have ‘globalized’ the most in recent years

    IT is the most global US sector; Healthcare the most global European sector. Utilities and telecom are respectively the most local

    Overall overseas revenue contribution has stalled (at 44%) the last three years, as globalization has come under pressure

    Looking at indices based on revenue rather than domicile transforms the investment universe: EM much larger, whilst US a lot smaller

     

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    India Passes Landmark Tax Reform in Modi's Biggest Win Yet

    This article by Vrishti Beniwal and Abhijit Roy Chowdhury for Bloomberg may be of interest to subscribers. Here is a section:

    Today is indeed a historic day," Finance Minister Arun Jaitley told reporters after the vote, noting it was significant that the vote passed unanimously. In a series of tweets, Modi congratulated lawmakers on a “path-breaking decision" and said “together we will take India to new heights of progress."

    For answers to all your questions about GST, click here. 

    The tax stands to benefit companies in the world’s fastest-growing major economy, where internal barriers to trade increase logistics and compliance costs. Indian equities climbed last week near the highest level since August 2015 as optimism increased that the measure would finally pass.
    “GST is the poster child of the Modi government’s reform agenda,” said Nilang Mehta, senior investment analyst at HSBC Global Asset Management, which oversees assets of about $429 billion. “Pushing this through will provide a major boost to the credibility of the reform process in India.”

    Plaudits rained in from India Inc. as it became apparent that the measure would pass on Wednesday evening. The country’s main business group hailed it as “one of the most awaited reform measures by the industry." PwC India called it “a momentous occasion." Microsoft India said it was a “positive development." Wal-Mart India praised it as an “extremely progressive step."

     

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