tag:blogger.com,1999:blog-26443349324561478602024-03-05T18:53:11.431-08:00Unknown InsightsLooking beyond the obvious, in the area of economy, finance and marketsAmar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comBlogger112125tag:blogger.com,1999:blog-2644334932456147860.post-19613399641431370042012-09-13T22:59:00.001-07:002012-09-15T22:47:57.230-07:00Pranab & Mamata Out, Mulayam In: Reforms on - III<p>Ever since Mamata and Pranab were sidelined and Mulayam joined the government, the government’s messaging around reforms has been clear and consistent.</p> <p>Whether it be the Vodafone tax issue, the taxation of foreign institutional investors (FII), the petrol price hike, the diesel price hike or noises around foreign direct investment (FDI) in retail, the government is slowly but surely pushing ahead the reforms agenda. And the timing could not be better. With elections just two years away, the government has enough elbow room to push ahead major initiatives and to start to see the fruits of its efforts.</p> <p>In my stories a few months back (<a href="http://www.unknowninsights.com/2012/06/pranab-mamata-out-mulayan-in-reforms-on.html">Pranab & Mamata Out, Mulayam In: Reforms on!</a>, <a href="http://www.unknowninsights.com/2012/07/pranab-mamata-out-mulayam-in-reforms-on.html">Pranab & Mamata Out, Mulayam In: Reforms on – II</a>), I consistently pointed out that with the new political equations in place, India is all set for the next set of reforms.</p> <p>Here are some key excerpts from my previous stories accompanied with the latest updates.</p> <p><em>Excerpt: So what does that mean now for some of the major reforms and other governance measures that have been on the backburner? Many of those measures are likely to go through … Mulayam is expected to be flexible …</em></p> <p>Update: As expected, Mulayam is being very flexible.</p> <p><em>Excerpt: This was followed by an interview of the prime minister with </em><a href="http://www.hindustantimes.com/India-news/NewDelhi/I-ve-maintained-high-standard-of-integrity-in-my-conduct/Article1-883969.aspx"><em>Hindustan Times</em></a> <em>yesterday, where the messaging continued. “The India growth story is intact. We will continue to work, as we have been doing for 8 years, to keep the story going,” said PM Manmohan Singh. He further said that in the short term the plan is to focus on bringing complete clarity on all tax matters, control fiscal deficit, revive mutual fund and insurance industries and provide a major push to infrastructure.</em><i></i></p> <p>Update: There is far more clarity around the controversial tax issues and attempts are being made to revive the mutual fund sector. However, not much movement has happened around the fiscal deficit and infrastructure. But I believe those will also start to pick up pace in the coming months.</p> <p><em>Excerpt: This messaging continues with </em><a href="http://www.business-standard.com/india/news/partial-diesel-decontrol-expected-after-prez-poll/479607/"><em>reports</em></a><em> that the government might bite the bullet on diesel subsidies, with partial decontrol of diesel prices after the presidential elections.</em></p> <p>Update: Diesel price hiked as projected. Besides, decontrol is a sham, since the oil companies continue to make petrol price decisions only with the approval of the Finance Ministry in spite of petrol having been decontrolled.</p> <p><em>Excerpt: So why had the reforms process stalled for so long? There was a nice story in FirstPost a few days back (</em><a href="http://www.firstpost.com/politics/pm-pranab-sonia-hiatus-was-key-cause-of-policy-paralysis-362580.html#disqus_thread"><em>PM-Pranab-Sonia hiatus was key cause of policy paralysis</em></a><em>), which captures some of the background dynamics that might have contributed to this situation. Here’s what it says:</em></p> <p><em>“It seems the PM wanted to keep the finance ministry with him even in 2004 but was dissuaded from doing so by the party. So Chidambaram got the job. When Chidambaram was removed in 2008, Pranab Mukherjee got it. After UPA’s resounding victory in 2009, the PM made another bid for the job and failed.”</em></p> <p><em>What this history makes clear is that Dr. Singh was always keen on doing the finance minister’s job himself, or getting another economist whom he trusts to do the job for him.</em></p> <p><em>The gap between the PM and his FM grew widest during the tenure of Pranab Mukherjee, when the latter subtly kept the PM out of the loop. The possible reason is ego: Pranab felt that he was </em><a href="http://www.firstpost.com/topic/person/manmohan-singh-profile-618.html"><em>Manmohan Singh</em></a><em>’s senior in politics. (Mukherjee was FM in the 1980s, when Singh was just a bureaucrat under him.)</em></p> <p>Update : A great insight from FirstPost. Chidambaram, after taking over a finance minister recently, lost no time in setting the reforms ball in motion, and in a direction different that that set by Pranab.</p> <p>Conclusion</p> <p>In the 1990s, Manmohan did magic with PVR’s support. Is he on his way to another round of magic, with Sonia’s support? I tend to believe so. Time magazine called Manmohan Singh an “underachiever” and he has also been badly bruised in the Indian media. I will continue to keep track of this story to see how it plays out over the next few years.</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-50072856919748849112012-09-13T22:26:00.001-07:002012-09-13T22:26:49.272-07:00IIP, Exports and Bank Credit Numbers Bad? No, Not At All<p>Over the last two days the numbers for the Index of Industrial Production (IIP), exports and bank credit were reported and, on the face of it, they look disappointing. However, a deeper look shows the long-term growth trend is intact and, in fact, all the key indicators point to the possibility that the growth slowdown is also over and the economy is getting ready for the next growth phase.</p> <p>To understand this better we need to look at the economic and market recovery during 2009 after the great bear market of 2008. During that time, equity markets started to make new intermediate highs in the April-June 2009 period in anticipation of the upcoming growth phase later in the year (which did materialize). These intermediate highs were accompanied with huge increases in foreign institutional investor (FII) inflows, even as IIP, bank credit and exports were tracing negative year-over-year (YoY) growth numbers. </p> <p>Refer to my analysis of December 2011 (<a href="http://www.unknowninsights.com/2011/12/macro-technicals-point-to-possible.html">Macro-Technicals Point to a Possible Bottom</a>) in which I talked about a possible bottom and the indicators for the same. My analysis shows that an economic recovery is preceded by falling inflation and a rise in commodity prices after making new lows as well as a rise in U.S. 10-year yields after making new lows. And that equity markets would continue to make new intermediate highs even as IIP and exports trace negative YoY growth numbers and bank credit YoY growth continues to fall. </p> <p>It is exactly the same recovery pattern that is being traced out now, with equity markets making new intermediate highs, a sharp increase in FII flows, falling wholesale inflation, a rise in commodity prices after new lows and a rise in U.S. 10-year yields after making major lows.</p> <p>In fact, the growth numbers for IIP, exports and bank credit being posted now are far better than during the economic and market recovery of 2009. For instance, exports are down 9.7% now compared to the minus 35% during the market recovery of 2009. As for bank credit growth, it is at 17% now compared to 15% during the 2009 recovery. In fact, bank credit growth went down to 10% later in 2009 even as equity markets continued to make new intermediate highs. As for IIP, it is running at around 1% now compared to minus 2% during 2009.</p> <p>The only cause for a concern is a fall in corporate profitability in the June 2012 quarter after tracing a recovery pattern in prior quarters. Overall economic recovery is typically preceded by a slight improvement in corporate profitability numbers and hence the concern. The silver lining here is that most key sectors – including banking, software and consumer goods – showed a rising profitability trend with overall corporate performance numbers being pulled down by infrastructure-related industries, primarily energy and steel. Keep in mind though that infrastructure sectors typically start to recover only when recoveries in the banking and consumer sectors are well-established. The extraordinarily poor numbers in energy and steel were driven by environmental regulatory issues and the banning of iron ore mining in certain states. With the ban already lifted in Karnataka, I believe these issues are transitory and the worst case is that the beginning of the next growth phase might get pushed <a>back </a>by a quarter or two.</p> <p>In conclusion, there is no cause for concern around the recently released numbers for IIP, exports and bank credit even though on the surface they might sound disappointing. Most of the economy- and market-related indicators are pointing toward the economic recovery picking up pace and the equity markets continuing to make new intermediate highs.</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-40475112838669850302012-09-07T00:35:00.001-07:002012-09-07T00:41:49.916-07:00Interpreting GDP Numbers: long-term trend intact<p>The GDP numbers declared last week for the quarter that ended in June 2012 showed the economy growing by 5.5% year-over-year (YoY). I came across many economists and analysts who say that in the short term there are signs of recovery given the 5.3% YoY growth in the quarter that ended in March 2012. There are many more who say that India’s long-term growth story is under threat given the sub 7% growth rates in the past five quarters.</p> <p>Well, here’s the right way to interpret these numbers.</p> <p>First, the difference of 20 basis points between the 5.5% and 5.3% is of no consequence, especially given the large revisions and mistakes occurring in the government’s numbers. Furthermore, the difference is just around 12 basis points if we include the second decimal place! And if you take into account that the March quarter typically shows a bump up in GDP growth rates, then the June 2012 quarterly growth rate of 5.5% should actually be interpreted a little negatively.</p> <p>Second, while looking at GDP numbers, an over-reliance on looking at YoY growth rates would very often lead to an incorrect interpretation. In order to correctly see the long-term growth trend and the impact of business cycles, one has to also look at the GDP chart in absolute numbers.</p> <p>Shown below is a chart of just the YoY growth rates. If you just look at the YoY growth rate chart, it does seem a little depressing.</p> <p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrTg72vJ8mI8935W7nYYJuZVaK9TQkS590TC0xnTP96f0petOLSK6ANTzi2kZ2IsXkZPcMsFZgJJD-P_W5ct1tQ7DsZX_BeDhEN6F-qX267o4sDBSDzfFbmT00NyQcY2w4N27tNZHPyag/s1600-h/image%25255B4%25255D.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="image" border="0" alt="image" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1pwiptFCSiC9Qwen60UTaN6rYDbQf3MHZjZ9rZfsyZTUlp_X_ajGPCAy8PX3GazqPJ-Vrkx_8m03tAX_v0_u9YAj8RdItreY_t4LdDFsZ98DWJaOLqE1SzTDRZ5bmJxiiW8B5YSMA-Pc/?imgmax=800" width="333" height="204" /></a> </p> <p>Now take a look at the chart of absolute GDP.</p> <p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8J2JISzrJrFwJTJ6LdibyG-UyEG5nh67cebF_Siz7-RI1cQ191-oql9rxJMkLgeFtGs1qN4-VqMToGqf_uV7R2-IR2Okxa9cMxXd7afY8ZDAfsZlHGd_fskGqgwASpSI9yBFjay4eKFo/s1600-h/image%25255B8%25255D.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="image" border="0" alt="image" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhc_lqG2eYBCAtLhYYa18bDuUOSeAFXW0onMHklQT3QRmyq0gF-f-IHxnP2IrjtjkXt_GxqF5MKodeIx_csKFve4hJ9TIIO97u3BG9yyG9AZ_NEW4t49PnOsQqZ9rdG9Nu1Ip6G22L-HA8/?imgmax=800" width="332" height="213" /></a> </p> <p>Does it show that the long-term story is over? Or does it show that the long-term story is well intact, albeit interspersed with minor business cycles? I rest my case.</p> <p>Recently, even the RBI reduced India’s long-term trend growth rate from 8% to 7.5%. I normally have great respect for the quality of analysis at the RBI, however, this time I would tend to believe the RBI might have been a little premature to reduce that rate.</p> <p>To put things in perspective take a look at the chart below. It shows a comparison between absolute GDP of the U.S. and India over the same period as the previous charts. Since the U.S. GDP is in USD and India’s GDP is in INR, I have indexed it to start at 100 for both.</p> <p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjE-h6TedBHK0m4mYdYzdceGXdlDMA_z_yR5zvJVRzjMO6l8gYly2g6BG6Hr-_VoXJluzQgvu7aT_d6LbgzLBJlddmHaqCIn0iNL1U3Hb8c7Jjh_xiLr3uDh6ZS5l9KN63fZBSnyrnOh1k/s1600-h/image%25255B12%25255D.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="image" border="0" alt="image" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWR82R_xJtepwBUi31C-orvFRwpzr9scBZM3urxOTvODM1NYG2FdoxIGYIgK7hwi4NCtWniN_dBqkh2CUBPRV2TFepsS8Qx9EcQQZX-sSCTsqSo_NnRjL1gcD8oepXSUWxCYtrtt9Xi14/?imgmax=800" width="345" height="198" /></a> </p> <p>If India’s long-term story is supposed to have ended based on the GDP trend, then what about the U.S.? Is it going vanish from the economic landscape and become a powerless player?</p> <p>Well, no. India’s growth story is not over and neither is the U.S. going to lose its pre-eminent position in the global politico-economic landscape anytime soon. Period.</p> <p> </p> <p><strong>Related Analysis</strong></p> <p>June ‘12 : <a href="http://www.unknowninsights.com/2012/06/india-growth-story-intact-interpreting.html">India’s Growth Story Intact: Interpreting macro numbers and trends the right way</a> <br />May ‘12 : <a href="http://www.unknowninsights.com/2012/05/gdp-downgrades-be-wary-of-research.html">GDP Downgrades: Be wary of research house estimates; India’s growth story intact</a> <br />May ‘12 : <a href="http://www.unknowninsights.com/2012/05/party-time-again-time-to-buy-panic-for.html">Party Time Again: Time to buy panic for the Sensex ride to 80,000</a> <br />Apr ‘12 : <a href="http://www.unknowninsights.com/2012/04/bull-run-intact-growth-rate-on-rise.html">Bull run intact, Growth rate on a rise</a> <br />Dec ‘11: <a href="http://www.unknowninsights.com/2011/12/macro-technicals-point-to-possible.html" target="_blank">Macro-Technicals point to a possible bottom</a></p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-55313631843928977272012-09-07T00:29:00.001-07:002012-09-07T00:29:13.878-07:00Darghi Says Nothing New<p>There has been a lot of anticipation about what European Central Bank president Mario Darghi would say today in the press conference. His statement is out and there is nothing new there. It is purely a clarification of the bond-buying plan declared on Aug. 2.</p> <p>Here’s what he said in his <a href="http://www.ecb.europa.eu/press/pressconf/2012/html/is120802.en.html">statement on Aug. 2:</a></p> <p><i>“The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective … <b>Over the coming weeks</b>, we will design the appropriate modalities for such policy measures.”</i></p> <p>The complete statement along with the transcript of the press conference on the ECB website provide a fair indication about the modalities, too!</p> <p>All that he has done today is provide clarification around the modalities and technicalities of the open-market operations already declared. There is absolutely nothing new there. </p> <p>Here are some key points (reformatted) from the ECB press release titled <a href="http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html">Technical Features of Outright Monetary Transactions</a>.</p> <ul> <li>The Outright Monetary Transaction (OMT) to be undertaken under the overall frame of EFSF/ESM. (Obviously, and already indicated in the Aug. 2 press conference.) </li> <li>The OMT would be preceded by strict conditionalities and a monitoring mechanism, with the IMF being involved. (Nothing new; already happening for Greece and mentioned in the Aug. 2 press conference, too.) </li> <li>Will buy bonds between one-year and three-year maturity. (Nothing new; already indicated in his Aug. 2 press conference.) </li> <li>Purchases will be fully sterilized, meaning the overall impact on the money supply will be neutral. (That’s obvious. The bond-buying program is not to inject liquidity, but to stabilize the bond markets.) </li> <li>The OMT bonds would rank the same (pari passu) with other private creditors. (Obviously, because if they have to take other creditors’ approval for a higher priority, the bond buying will remain on paper as other creditors would be unlikely to agree.) </li> </ul> <p>All the hype around today’s press conference was overdone. In fact, there was really no need for a press conference if the only agenda was to release a few points around the modalities of the OMT transactions.</p> <p></p> <p> </p> <p><u>Related Posts</u></p> May ‘12 : <a href="http://www.unknowninsights.com/2012/05/oecd-report-part-truth-part.html" target="_blank">OECD Report: Part truth, part scaremongering</a> <br />May ‘12 : <a href="http://www.unknowninsights.com/2012/05/greece-paranoia-blessing-in-disguise.html" target="_blank">Greece paranoia – a blessing in disguise for India</a> <br />May ‘12 : <a href="http://www.unknowninsights.com/2012/05/global-recovery-robust-fears-unfounded.html" target="_blank">Global recovery robust, fears unfounded</a> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-10530286717167225922012-07-05T22:52:00.003-07:002012-07-05T22:52:43.821-07:00Pranab & Mamata Out, Mulayam In: Reforms on - II<p>All the messaging from the Prime Minister’s Office continues to point towards only one thing - reforms are on!</p> <p>In my story last week (<a href="http://www.unknowninsights.com/2012/06/pranab-mamata-out-mulayan-in-reforms-on.html">Pranab & Mamata Out, Mulayam In: Reforms on!</a>), I pointed out how, with Mamata sidelined, Mulayam in its fold and Pranab as president, Congress has not had it so good in many years. And that meant the reforms process was now on.</p> <p>In fact, I had pointed this out as far back as May 2012 (<a href="http://www.unknowninsights.com/2012/05/reform-initiative-mulayam-to-decide-not.html">Reform Initiative: Mulayam to decide, not Mamata nor Manmohan</a>). This was after Mulayam “pledged” support to the UPA government.</p> <p><em>“So what does that mean now for some of the major reforms and other governance measures that have been on the backburner? Many of those measures are likely to go through … Mulayam is expected to be flexible …”</em></p> <p>The government’s decision to postpone implementation of GAAR-related tax provisions by one year, and a promise to clarify the provisions and remove uncertainties in the minds of foreign investors, was a major sentiment booster, with equity markets going up nearly 5% over the past week.</p> <p>This was followed by an interview of the prime minister with <a href="http://www.hindustantimes.com/India-news/NewDelhi/I-ve-maintained-high-standard-of-integrity-in-my-conduct/Article1-883969.aspx">Hindustan Times</a> yesterday, where the messaging continued.<em> “The India growth story is intact. We will continue to work, as we have been doing for 8 years, to keep the story going,”</em> said PM Manmohan Singh. He further said that in the short term the plan is to focus on bringing complete clarity on all tax matters, control fiscal deficit, revive mutual fund and insurance industries and provide a major push to infrastructure.</p> <p>This messaging continues with <a href="http://www.business-standard.com/india/news/partial-diesel-decontrol-expected-after-prez-poll/479607/">reports</a> that the government might bite the bullet on diesel subsidies, with partial decontrol of diesel prices after the presidential elections.</p> <p>So why had the reforms process stalled for so long? There was a nice story in FirstPost a few days back (<a href="http://www.firstpost.com/politics/pm-pranab-sonia-hiatus-was-key-cause-of-policy-paralysis-362580.html#disqus_thread">PM-Pranab-Sonia hiatus was key cause of policy paralysis</a>), which captures some of the background dynamics that might have contributed to this situation. Here’s what it says:</p> <p><em>“It seems the PM wanted to keep the finance ministry with him even in 2004 but was dissuaded from doing so by the party. So Chidambaram got the job. When Chidambaram was removed in 2008, Pranab Mukherjee got it. After UPA’s resounding victory in 2009, the PM made another bid for the job and failed.”</em></p> <p><em>“What this history makes clear is that Dr. Singh was always keen on doing the finance minister’s job himself, or getting another economist whom he trusts to do the job for him.”</em></p> <p><em>“The gap between the PM and his FM grew widest during the tenure of Pranab Mukherjee, when the latter subtly kept the PM out of the loop. The possible reason is ego: Pranab felt that he was </em><a href="http://www.firstpost.com/topic/person/manmohan-singh-profile-618.html"><em>Manmohan Singh</em></a><em>’s senior in politics. (Mukherjee was FM in the 1980s, when Singh was just a bureaucrat under him.)”</em></p> <p>All in all, after a very long gap, there seems to be some real hope that the reforms process is getting back on track.</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-35471523754671095522012-07-05T22:52:00.001-07:002012-07-05T22:53:07.696-07:00Rainfall Shortage at 30%: Are we heading for another drought?<p>A report from the India Meteorological Department (IMD) indicates there was a whopping <a href="http://www.imd.gov.in/section/hydro/img/week-rain.jpg">49% rainfall shortage for the week</a> ended July 4 and a shortage of <a href="http://www.imd.gov.in/section/hydro/img/seasonal-rain.jpg">30% for the season to date</a>.</p> <p>This reminds of 2009, when the IMD kept hoping the rainfall shortage in the initial part of the monsoon season would be made up in later parts. But that never happened, and finally the season ended with a 23% rainfall shortage, supposedly the <a href="http://online.wsj.com/article/SB125435762124654633.html">worst drought since 1972</a>. If things don’t improve soon, then 2012 could become the worst drought year in nearly 40 years.</p> <p>I came across a nice story done by Akshat Kaushal last year in Business Standard titled <a href="http://www.business-standard.com/india/news/has-indias-met-dept-failed-us/442527/">Has India’s Met Dept failed us?</a> Here’s what he says about the IMD’s forecast accuracy:</p> <p><em>“The failure of the IMD to predict the monsoons correctly in 2009 was not a one-off incident. Consider this: Since 1988, in the last 23 years, the IMD has been able to successfully predict the monsoon only nine times – a success rate of just 40 per cent. Significantly, the IMD has never predicted a drought. In fact, in the last decade, the country experienced droughts on three separate occasions, and the IMD’s predictions in every one of these years pointed towards abundant or normal rain.”</em></p> <p>However, even if there is full-fledged drought in the country this year, my analysis of last week (<a href="http://www.unknowninsights.com/2012/06/rainfall-shortage-even-if-theres.html">Rainfall Shortage: Even if there’s a drought, the impact is likely to be minimal</a>) shows that the impact on GDP growth would be minimal.</p> <p>Well, let’s see how things pan out for the monsoons over the next few weeks.</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-17354246240490280742012-07-05T22:50:00.001-07:002012-07-05T22:54:19.057-07:00Corn Price Rise: Impact on India limited<p>Global corn prices are showing a sharp rise just as they did in 2008, this time on expectation of a poor yield in the U.S. Take a look at this 20-year chart of U.S. spot prices (fro<a href="http://vixandmore.blogspot.in/">m Vix & More)</a>. U.S spot prices for corn are up nearly 30% over the past month.</p> <p><a href="file:///C:\Documents%20and%20Settings\Amar\Local%20Settings\Temp\WindowsLiveWriter-429641856\supfiles88CBDFE\image%5b3%5d.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="clip_image002" border="0" alt="clip_image002" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxm9ymEgvBumAN4LFBykUaxhWZjLEIxTTLXQbGJCKm-c-TbzR0GDf9uYdD6KDB52anQxjHfRDNMdd8HW8MzQV3Y2h4TIeKpwUC92Y4IIgAo02hx24QVM9c0bJfwl2wJR2sfKahnSZlkBg/?imgmax=800" width="312" height="178" /></a></p> <p>In India, the prices are up about 15% over the past month (see the <a href="http://www.ncdex.com/Index.aspx">NCDEX</a> chart below – Maize Feed, Davangere).</p> <p><a href="file:///C:\Documents%20and%20Settings\Amar\Local%20Settings\Temp\WindowsLiveWriter-429641856\supfiles88CBDFE\image%5b7%5d.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="clip_image004" border="0" alt="clip_image004" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuUOc5zhS1tKhLTFoobzrKRvC0kNDTBmzMRJPqnm2yaHQu_6FrdlEK16veEFS7FeCsCqu5Lhl9lSony3QSsFB16WIK32ariuzT1m9Ntn2gr_A2hiiyRL4DlrzpfPakXkfPY24SJac1zOM/?imgmax=800" width="337" height="204" /></a></p> <p>As far as India is concerned, the largest impact would be on the price of poultry as more than half of the corn produced in the country is <a href="http://www.assocham.org/prels/shownews-archive.php?id=3118">consumed by the poultry sector</a>. With the poultry market growing by about 20% annually, as long as corn prices remain high, that would continue to put additional pressure on poultry prices.</p> <p>What happens if domestic prices continue to rise? Given that India exports a large part of its corn, my sense is that government will intervene to arrest the price rise, most likely by banning exports. That is exactly the kind of thing it did during 2008, when corn prices were showing a sharp rise.</p> <p>The only strange part in this whole phenomenon is that global prices are rising even as the International Grains Council is expecting a higher global production this year. Here is what it says in its <a href="http://www.igc.int/en/downloads/gmrsummary/gmrsumme.pdf">report of July 2, 2012</a>:</p> <p><em>“Overly hot and dry Midwest weather conditions have led to a downgrade in the U.S. maize production forecast, with projected yields now likely to be below the ten-year trend.  Despite the downgrade, the crop is still forecast at a record 350m. tons, although the risks are to the downside.  However, projections for some other countries, including China and India, are increased this month.  Consequently, world maize production is still expected to rise by 5.7% to 917m. tons in 2012/13.”</em></p> <p>It almost seems as if corn prices have been driven up more by speculation than by lower yields in the U.S. And just as in 2008-09, when the price dropped sharply, there’s every likelihood of the same happening this time. </p> <p>Either way, although higher domestic corn prices would impact poultry prices and consequently food inflation, the overall impact on the economy would be fairly limited.</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-10292550012981289802012-07-05T22:48:00.001-07:002012-07-05T22:48:28.172-07:00Capital Economics’ India Report : Another example of poor research<p>There is a research report from a macroeconomics consultancy firm called Capital Economics, which seems to be getting some degree of visibility in Indian media. As per <a href="http://www.moneycontrol.com/news/economy/indias-economic-troubles-self-inflicted-report_726500.html">news reports</a>, the firm attributes the recent slowdown in India to governance issues, estimates sub 5% GDP growth for Q1 and believes no reforms would happen till the 2014 general elections.</p> <p>Based on all my analyses of the past one year, I believe that Capital Economics might have got some of its economics wrong. I don’t mean to pick on Capital Economics in particular, but this is another example of shallow analysis by a set of experienced folks.</p> <p><u>Growth slowdown caused by governance issues?</u></p> <p>Lets take a look at its first point about attributing the recent slowdown to governance issues. That seems a little far fetched, when seen in the context of strong growth that has happened during the past five to six years, a period marked by an acute lack of governance. The slowdown of past few quarters is purely short term business cycles playing out, driven primarily by a slowdown across the globe.</p> <p>Take a look at India’s GDP chart below, which shows the absolute value of GDP at fixed prices over the past seven years. I guess the chart very clearly shows that the long term trend has been pretty much intact, though interspersed with short term cyclical slowdowns. Key point to note is that YoY growth rate charts are not always the right way to interpret these numbers.</p> <p><a href="file:///C:\Documents%20and%20Settings\Amar\Local%20Settings\Temp\WindowsLiveWriter-429641856\supfiles88AACE1\image3.png"><img style="border-bottom: 0px; border-left: 0px; display: inline; border-top: 0px; border-right: 0px" title="clip_image002" border="0" alt="clip_image002" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2YErAtCQgoy5mOp-7cGWF8wD_eZxlqPdimnkkpjpX75kIMDbSWZJjvu57N3aq_QAZxhPFwsoWNCNHgSXy23BwGb7_RA3uyeqcK-ufDrbMdbUCbAt4UjuuEdHXqsd9lgqQfzNXSeLFGT4/?imgmax=800" width="244" height="151" /></a></p> <p><u>Sub 5% GDP growth in Q1 2012-13?</u></p> <p>As for sub 5% GDP growth in Q1, I really don’t have a call on such a short term and error prone number. But even if the YoY growth was less than 5% GDP and in say 4.5% range, the long term trend would still remain intact. All that it would mean is that there was a short term cyclical slowdown. </p> <p><u>No reforms till 2014?</u></p> <p>Regarding Capital Economics’ third point about reform process remaining stalled till the 2014 elections, they might have got this one horribly wrong. In one of my previous analysis I had argued how, with Mamata sidelined, Mulayam in its fold and Pranab as President, Congress has not had it so good in many years. Mulayam provides the numbers in parliament to pass through some of reform measures and Pranab was seen as somewhat as an anti reformist. My sense is that the reforms process will pick up steam as the elections come closer, in order for the government to showcase its developmental story.</p> <p><u>Capital Economics past record</u></p> <p>Lets now take a look at Capital Economics past forecasts. Copying below an excerpt from a <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aEqKr0l7Qa48&refer=home">Bloomberg story dated Dec 7, 2008</a></p> <p><i>"Capital Economics` Khan expects India`s $1.2 trillion economy to grow 5 percent in 2009, less than the 6.3 percent forecast by the International Monetary Fund”</i></p> <p>In 2008-09, Actual GDP growth was 6.8% and the forecast was being made when half the year was already over and they still got it horribly wrong !</p> <p><u>Low quality research from top ranking firms</u></p> <p>In my previous analyses, I have been very critical of the quality of research at some of the top firms including Goldman Sachs, Morgan Stanley, Fitch and S&P`s of the world. I guess Capital Economics falls in the same category, though it is in no way considered a ‘top’ research firm, so to say.</p> <p><u>But good research also exits</u></p> <p>Amongst the top research firms, I have found JP Morgan India (Kalpana Morparia?), to have a very good sense of India’s long term growth story. They had the courage to publicly talk about their confidence in India long term growth trend right during Oct 2008 also, at the time Nifty was around 2500 levels. They continue to stick to their stand on the long term growth trend for India.</p> <p>There is a nice <a href="http://india.blogs.nytimes.com/2012/06/11/dont-count-india-out-just-yet/">analysis in NY Times from Vivek Dehejia</a>. He is amongst a handful of economists who has been able to differentiate between long term trend and short term business cycles. </p> <p>All my detailed analyses of past nine months have continued to suggest that he India long term growth story has been very well intact for the past decade.</p> <p><u>Related Analysis</u></p> <ul> <li><a href="http://www.unknowninsights.com/2012/06/pranab-mamata-out-mulayan-in-reforms-on.html">Jun '12 Pranab & Mamata out, Mulayan in – Reforms On !</a></li> <li><a href="http://www.unknowninsights.com/2012/06/jp-morgan-india-courageous-leader.html">Jun'12: JP Morgan India: Courageous leader</a></li> <li><a href="http://www.blogger.com/blogger.g?blogID=2644334932456147860#editor/target=post;postID=1262129861106539969;onPublishedMenu=template;onClosedMenu=template;postNum=8;src=postname">June ‘12: India’s Growth Story Intact</a></li> <li><a href="http://www.unknowninsights.com/2012/06/india-growth-story-intact-interpreting.html">Jun'12: Interpreting macro numbers the right way</a></li> <li><a href="http://www.unknowninsights.com/2012/06/be-wary-of-s-ratings.html">Jun'12 Be wary of S&P ratings</a></li> <li><a href="http://www.unknowninsights.com/2012/05/gdp-downgrades-be-wary-of-research.html">May'12: Be wary of research house estimates</a></li> <li><a href="http://www.unknowninsights.com/2011/12/macro-technicals-point-to-possible.html">Dec '11: Macro-Technicals point to a possible bottom</a></li> </ul> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-71758184851562879062012-06-29T02:24:00.001-07:002012-06-29T02:24:41.159-07:00E.U. Plan : More hot air ?<p>Notwithstanding the reactions from the markets to the Euro deal, the reactions from some Euro trackers and economists are pretty pessimistic.</p> <p>Looking at some of these reactions, it seems that the current Euro deal is another example of kicking the can down the road. </p> <p>Here’s what Nouriel Roubni says in his Tweets: </p> <p><em>“The EU agreement is much less than needed. Markets delusional in cheering this half baked agreement that has little details in it.”</em></p> <p><em>“ESM is senior to private claims. So how can loans to Spanish gov 2 recap banks be pari passu with bonds? By using the to-be-phased-out EFSF?”</em></p> <p><em>“Only 2 pieces of a banking union in EU deal: joint supervision; direct ESM bank recap. Missing 2 key parts: EZ-wide depst ins; insolv regime”</em></p> <p>And here is Tyler Durden  on ZeroHedge:</p> <p><em>“The early Friday morning release of an entirely conditional 'plan' for a 'plan' that will </em><strong><i>likely require the ESM contracts to be torn up and a new contract to be re-ratified (by ALL members - including Finland and Germany)</i></strong><em>, due to the stripping of the ESM seniority via the EFSF 'workaround', was high-fived by any and all EU leaders still standing. Is it any wonder (given the conditionality and ratifications required) that the best the market could manage, on what is now obviously nothing but yet another watered-down talking-point ridden 'promise-of-more-to-come' plan (as opposed to the impossible becoming possible as Ireland's Kenny so eloquently described it), is a 1% pop in US equity futures”</em></p> <p>After some 20 euro summits and some three years of the Euro crisis, this one too seems to be just another promise of a plan, rather than concrete action.</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-67015660263478941752012-06-29T02:23:00.001-07:002012-06-29T02:23:48.421-07:00Rainfall shortage : Even if there’s a drought, the impact is likely to be minimal<p>With 25% season shortfall in rainfall to date, there are <a href="http://zeenews.india.com/business/news/economy/not-enough-being-done-to-tackle-drought-experts_54622.html">drought-like conditions</a> prevailing in many parts of the country. However, even if there is full-fledged drought in the country this year, my analysis shows that the impact on GDP growth would be minimal.</p> <p>Season rainfall to date as per the Indian Metrological Department (IMD) is around <a href="http://www.imd.gov.in/section/hydro/img/seasonal-rain.jpg">23% less than the long period</a> average as of 27th June 2012. Furthermore, the <a href="http://www.imd.gov.in/section/nhac/dynamic/press_english_2.pdf">long range forecast update</a> of 22nd June 2012 from IMD does not sound too encouraging. For the month of July there is just a 41% probability of normal monsoons and a huge 36% probability for below normal monsoons. Very similar probabilities for the month of August 2012 are also predicted. That does sound very depressing.</p> <p>Keep in mind, however, that the IMD is still sticking to a normal monsoon forecast for now.  “Rainfall over the country as a  whole for the 2012 southwest monsoon season (June to September) is most likely to be normal (96-104% of LPA)” says IMD in its press release.</p> <p><u>So, what next?</u></p> <p>Even assuming a full-fledged drought like the one in 2009,the impact on GDP growth <a href="http://www.reuters.com/article/2009/10/07/india-planpanel-farm-idUSBMA00609620091007">would be minimal</a>, even though the agricultural population could face some hardships. The reason for this is that agriculture now comprises only around 15% of GDP. Even though agriculture employs nearly half of the country’s population, there is <a href="http://wrd.mydigitalfc.com/news/who%E2%80%99s-afraid-drought-740">enough money in rural areas</a> due to the good harvests of the past two years and the government’s job guarantee schemes to help mitigate the impact on the rural population.</p> <p>The drought of 2009 was supposed to be the <a href="http://articles.economictimes.indiatimes.com/2009-09-30/news/27650158_1_bad-monsoon-monsoon-rainfall-rice-output">worst in 37 years</a>, but that same year was the year of recovery in the Indian economy, with a GDP growth of around 8.3% , up from 6.8% the previous year ! </p> <p>I came across a very nice  <a href="http://wrd.mydigitalfc.com/news/who%E2%80%99s-afraid-drought-740">analysis in mydigitalfc.com</a> of Aug 2009, which said <em>“Corporate India remains quietly confident of weathering the drought this year…impact is expected to be limited and would not be felt immediately”</em>. </p> <p>There was another <a href="http://www.livemint.com/2009/08/25212624/Droughts-and-decoupling.html">great analysis from Niranjan Rajadhyaksha</a> in Livemint.com in August 2009, the summary of which is: <em>“The record suggests that India’s economy began decoupling from its farm sector at least two decades ago”</em></p> <p>Of course if the Industrial recovery that is currently underway loses steam, the story could be very different this time. But as of now there are no signs that the recovery is being hindered. And of course there is no doubt that, just like in 2009, there would be a  <a href="http://in.reuters.com/article/2009/08/31/india-monsoon-idINDEL50681420090831">rise in sugar prices</a>. But food grain prices might not rise too much due to adequate stocks of food grains within the country. </p> <p>In summary, since India posted a GDP recovery in 2009, the year the worst drought of 37 years stuck, I doubt there would be significant negative impact this year even if there were drought conditions.</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-64231498812034382832012-06-29T02:22:00.001-07:002012-06-29T02:22:54.575-07:00Pranab & Mamata out, Mulayan in – Reforms On !<p>Within just a few days of Finance Minister (FM) Pranab Mukherjee having resigned, the Prime Minister, (PM) Manmohan Singh, has started to reverse some of the regressive tax policies being pushed by the erstwhile FM. </p> <p>Venky Vembu in his <a href="http://www.firstpost.com/economy/some-sense-at-last-on-gaar-but-pm-too-must-share-the-blame-361078.html">fantastic story on Firstpost.com</a> says<em>” Let’s be very clear about it: there is nothing wrong with plugging tax loopholes……But where Pranab-da erred was in going overboard with his exertions to knock the stuffing out of Vodafone….”</em></p> <p>The messaging from the Prime Minister’s Office is clear : Reforms are On !</p> <p>When the PM of a country reverses the decisions of its FM and provides pro-reforms clarifications within one day of the FM resigning, the messaging there cannot be ignored. The PM did not wait for a month, he did not even wait for a week - he started acting even "before the body got cold".</p> <p>No doubt the fact of PM Manmohan Singh’s responsibility for the slowdown in the reforms process, and the large scale corruption going on right under his nose, cannot be denied. But possibly, he might still have a chance to redeem himself and set right the wrong that has happened.</p> <p>As for the numbers game in Parliament, Manmohan Singh’s government is well placed with Mulayam in its fold and Mamata being sidelined.</p> <p>There was a great story on First Post: <a href="http://www.firstpost.com/politics/with-mulayam-on-its-side-upa-wont-need-mamata-anymore-318097.html">With Mulayam on its side, UPA won’t need Mamata anymore</a> , which had correctly identified the changing political equations in the country. To quote from the story:</p> <p><i>“ Indicatively, the Samajwadi Party has 21 MPs in the Lok Sabha and eight in the Rajya Sabha; the Trinamool Congress, on the other hand, has 20 MPs in the Lok Sabha and nine in the Rajya Sabha. But it’s not just about the numbers. As </i><a href="http://www.telegraphindia.com/1120523/jsp/frontpage/story_15521699.jsp"><i>The Telegraph reported</i></a><i>, citing Congress sources, having Mulayam Singh by its side gives the Congress much more elbow room on policy matters: for all the “samajwadi” economic philosophy that his party embraces, Mulayam Singh is perceived to be “more flexible” than Mamata when it comes to economic reforms.”</i></p> <p>So what does that mean now for some of the major reforms and other governance measures that have been on the backburner?</p> <p>Many of those measures are likely to go through. However, Karuna can still play the spoilsport, but only to a limited extent. CBI (Congress) has cases pending against his daughter and Raja, one of his key lieutenants.</p> <p>Mulayam is expected to be flexible. But why is that so? For the same reason that Lalu Prasad is flexible … all the CBI cases pending against him, his relatives and his friends, cases ranging from murder to bribery. Congress has done this kind of deal with Mulayam before, withdrawing a CBI case in return for support. That’s the kind of deal they must have worked out this time.</p> <p>All in all, with Mamata sidelined, Mulayam in its fold and Pranab as President, Congress has not had it so good in many years.</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-15842935744751289742012-06-27T00:50:00.001-07:002012-06-27T00:50:10.065-07:00JP Morgan India: Courageous leader<p>JP Morgan India upgraded Indian equities to “overweight” from “neutral” last week. This was despite acknowledging the risk factors facing the economy, and demonstrated that they were encouraged by what they called a number of more positive factors including historic valuations. </p> <p>I don’t usually give much credence to reports from agencies like S&P, Moody’s, Goldman Sachs, Morgan Stanley and most others. </p> <p>However, JP Morgan India, under Kalpana Morparia, seems to have got the long-term trend right, even <a href="http://www.dnaindia.com/money/report_india-s-7-5pct-growth-forecast-healthy-jp-morgan_1201322">as far back as October 2008</a> when the markets were making a capitulation bottom. In September 2011, they had the courage to call the <a href="http://articles.economictimes.indiatimes.com/2011-09-16/news/30165388_1_iip-numbers-sajjid-chinoy-capital-goods">IIP numbers misleading</a> and take a stand stating that economic growth is not collapsing. </p> <p>Among the major global financial firms, JP Morgan is not just the first out of the blocks in acknowledging the strengths of the India story, but it has also made a bullish call when pretty much every other major firm has made a bearish call. That takes a lot of courage in the murky world of large and influential financial firms.</p> <p>Moody’s had followed immediately with a “stable” outlook for India sovereign rating. That’s again courageous given that S&P and Fitch have scaled down their outlook to “negative” with a threat of downgrading the sovereign rating to below investment grade / junk status.</p> <p>In fact, it now seems that every other brokerage firm is starting to come out of its slumber in trying to rate India “overweight”, “stable” etc.</p> <p>The question to ask is that when the signs of recovery and an upcoming bull market were apparent as long ago as back in Dec 2011 (<a href="http://www.unknowninsights.com/2011/12/macro-technicals-point-to-possible.html">Dec '11: Macro-Technicals point to a possible bottom</a>) why are these agencies (except maybe JP Morgan) only waking up now?</p> <p>Related Analyses:</p> <ul> <li><a href="http://www.blogger.com/blogger.g?blogID=2644334932456147860#editor/target=post;postID=1262129861106539969;onPublishedMenu=template;onClosedMenu=template;postNum=8;src=postname">June ‘12: India’s Growth Story Intact: Interpreting macro numbers the right way.</a></li> <li><a href="http://www.unknowninsights.com/2012/05/party-time-again-time-to-buy-panic-for.html">May ‘12/ Mar ‘08 : Party time again: Time to buy panic for the Sensex ride to 80000</a></li> <li><a href="http://www.blogger.com/blogger.g?blogID=2644334932456147860#editor/target=post;postID=6167426996145523076;onPublishedMenu=template;onClosedMenu=template;postNum=41;src=postname">April ‘12 : Bull run intact, Growth rate on a rise</a></li> <li><a href="http://www.unknowninsights.com/2011/12/macro-technicals-point-to-possible.html">Dec '11: Macro-Technicals point to a possible bottom</a></li> </ul> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-78022288046177416322012-06-26T23:40:00.001-07:002012-06-26T23:40:34.628-07:00Rupee Fall: No capital flight, only speculation (Corrected)<p>The current fall in the Rupee is purely speculative as there are no signs of flight of capital.</p> <p>This is very similar to the situation in April 2009 – when the Rupee was making new lows even as inflation was coming down, corporate profitability was improving and stock markets had just broken out of bear market lows. </p> <p>Consider this: </p> <ul> <li>The foreign exchange (Forex) reserves as of June 15, 2012 were around $289 Bn, just around $ 20 Bn lower than a year ago, and about $ 2 Bn higher than a week prior. The Forex situation has been fairly stable for the past year, with only minor and ‘routine’ fluctuations. </li> <li>FII remains long-term bullish based on equity inflows, with massive net inflows of around Rs 36,000 Cr so far during 2012. Though there were net outflows in April and May of Rs 1,600 Cr and Rs 3,100Cr, respectively, the amounts are minor. In the current month to date, there have been minor net inflows of around Rs 500 Cr.” (to June 26th).</li> </ul> <p>So what next? </p> <p>The fall might continue a bit longer; however I don’t expect it to either to fall significantly more, or to have any significant negative impact on corporate profitability. The reasons for this are: </p> <ul> <li>At some point, the RBI and the government will crack down hard on speculators and that would be the end of the Rupee fall. The RBI has already issued a veiled warning to speculative interests. The next set of measures would be far harsher. Those who seem to underestimate the absolute power that a state commands, do so at their own peril. Ask Vodafone. </li> <li>Oil and all major commodities are down more than 25% from about a year ago and are on a sharp downtrend. That will cushion the impact of the rising rupee. </li> <li>With corporate India posting a robust 20% growth in bottom-line for the March 2012 quarter, a robust economic recovery is well underway. With improving economic fundamentals, it would be just a matter of time before the speculative positions in the Rupee start to unwind.</li> </ul> <p>The situation today bears an uncanny resemblance to the one two years ago, around April 2009. Even during that time, the rupee was making new lows, even as a recovery was well underway and stock markets had broken off the lows. </p> <p>With the short term economic slowdown over, and a robust recovery underway, it’s very likely that the Rupee fall would get arrested and stock markets make new highs. </p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-79565643325158591422012-06-26T23:23:00.001-07:002012-06-26T23:38:56.452-07:00Flog me, I made basic data interpretation mistakes<p>I have just realized that I made two horrible and very embarrassing data interpretation mistakes in one of my prior posts. These are the type of mistake about which I have been ruthless with folks like S&P, and the Morgan Stanleys and Goldman Sachs of the world. I now too deserve to be accorded the same treatment, i.e. public flogging on the internet.</p> <p>Refer to my analysis <a href="http://www.unknowninsights.com/2012/06/rupee-fall-no-capital-flight-only.html">Rupee Fall: No capital flight, only speculation–II</a> , where I say:</p> <p>“The foreign exchange (Forex) reserves as of June 15, 2012 were around Rs 16000 Cr, around Rs 2000 Cr higher than a year ago, and Rs 200 Cr more than a week prior. Not only is the Forex situation comfortable; in fact India’s Forex reserves have been on a slow uptrend over the past year.”       </p> <p>Here’s what I should have said:</p> <p>“The foreign exchange (Forex) reserves as of June 15, 2012 were around $289 Bn, just around $ 20 Bn lower than a year ago, and about $ 2 Bn higher than a week prior. The Forex situation has been fairly stable for the past year, with only minor and ‘routine’ fluctuations”.</p> <p>The mistake I made was in using the Rupee amount in Forex instead of using the Dollar amount. That’s a very basic kind of error to make. It happened because I was in a rush to post my analysis. The conclusion of my story was that that there is no flight of capital out of India. Though there is no change in this conclusion, nevertheless this kind of error is simply unacceptable.</p> <p>I then go on to make a second mistake in the same post ! This time around FII numbers. </p> <p>Here’s what I said</p> <p>“FII remains long-term bullish based on equity inflows, with massive net inflows of Rs 17,000 Cr so far during 2012. Though there were net outflows in April and May of Rs 900 Cr and Rs 2,200 Cr, respectively, the amounts are minor. In the current month to date, there have been minor net inflows of Rs 1,500 Cr”</p> <p>Here’s what I should have said :</p> <p>“ FII remains long-term bullish based on equity inflows, with massive net inflows of around Rs 36,000 Cr so far during 2012. Though there were net outflows in April and May of Rs 1,600 Cr and Rs 3,100Cr, respectively, the amounts are minor. In the current month to date, there have been minor net inflows of around Rs 400 Cr.”</p> <p>I used the combined FII and DII numbers instead of just the FII numbers. Again, a totally unacceptable kind of mistake.</p> <p>I pull no punches when I criticize folks like S&P, Morgan Stanley, Fitch, Goldman Sachs and others when they make basic data interpretation errors. I believe that it’s only fair that I too subject myself to getting flogged publicly on the internet, when I make a similar mistake. </p> <p>What am I planning to do about this going forward? Two things:</p> <p>I usually do a data audit before posting a story. I have been a bit negligent in that regard in the past few weeks; in future I plan to become more rigorous about this.</p> <p>I am also considering working with an experienced market analyst who will review my analyses before I post them, so that such issues and other errors are caught well in time.</p> <p>These types of mistakes are shameful and totally unacceptable and I am deeply embarrassed. I sincerely apologize to my readers and promise that I am going to take the greatest care to ensure that something like this never happens again. I also promise to be ruthless with other market professionals, and even more ruthless with myself, whenever I come across a basic data interpretation issue like this.</p> <u>Related Analyses</u> <a href="http://www.unknowninsights.com/2012/06/when-moodys-downgrades-markets-rise.html"></a> <br /><a href="http://www.unknowninsights.com/2012/06/when-moodys-downgrades-markets-rise.html">When Moody’s Downgrades, Markets Rise!</a> <br /><a href="http://www.unknowninsights.com/2012/06/interpreting-iip-numbers-right-way.html">Interpreting IIP Numbers the Right Way</a> <br /><a href="http://www.unknowninsights.com/2012/06/be-wary-of-s-ratings.html">Be wary of S&P ratings</a> <br /><a href="http://www.unknowninsights.com/2012/06/india-growth-story-intact-interpreting.html">Interpreting macro numbers the right way</a>    <br /><a href="http://www.unknowninsights.com/2012/05/gdp-downgrades-be-wary-of-research.html">Be wary of research house estimates</a>    <br /><a href="http://www.unknowninsights.com/2012/05/be-wary-of-marc-fabers-public-forecasts.html">Be wary of Marc Faber’s public forecasts</a> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-64402886864768877852012-06-22T13:28:00.001-07:002012-06-23T08:49:22.109-07:00Rupee Fall: No capital flight, only speculation - II<p> <p>The current fall in the Rupee is purely speculative as there are no signs of flight of capital. </p> <p>This is very similar to the situation in April 2009 – when the Rupee was making new lows even as inflation was coming down, corporate profitability was improving and stock markets had just broken out of bear market lows.</p> <p>Consider this:</p> <ul> <li>The foreign exchange (Forex) reserves as of June 15, 2012 were around Rs 16000 Cr, around Rs 2000 Cr higher than a year ago, and Rs 200 Cr more than a week prior. Not only is the Forex situation comfortable; in fact India’s Forex reserves have been on a slow uptrend over the past year. </li> <li>FII remains long-term bullish based on equity inflows, with massive net inflows of Rs 17,000 Cr so far during 2012. Though there were net outflows in April and May of Rs 900 Cr and Rs 2,200 Cr, respectively, the amounts are minor. In the current month to date, there have been minor net inflows of Rs 1,500 Cr. </li> </ul> <p>So what next?</p> <p>The fall might continue a bit longer; however I don’t expect it to either fall significantly more, or have any significant negative impact on corporate profitability. The reasons for this are:</p> <ul> <li>At some point, the RBI and the government will crack down hard on speculators and that would be the end of the Rupee fall. The RBI has already issued a veiled warning to speculative interests. The next set of measures would be far harsher. Those who seem to underestimate the absolute power that a state commands, do so at their own peril. Ask Vodafone. </li> <li>Oil and all major commodities are down more than 25% from about a year ago and are on a sharp downtrend. That will cushion the impact of the rising rupee. </li> <li>With corporate India posting a robust 20% growth in bottom-line for the March 2012 quarter, a robust economic recovery is well underway. With improving economic fundamentals, it would be just a matter of time before the speculative positions in the Rupee start to unwind. </li> </ul> <p>The situation today bears an uncanny resemblance to the one two years ago, around April 2009. Even during that time, the rupee was making new lows, even as a recovery was well underway and stock markets had broken off the lows.</p> <p>With the short term economic slowdown over, and a robust recovery underway, it’s very likely that the Rupee fall would get arrested and stock markets make new highs.</p> <p><u>Related Analyses</u> <br /><a href="http://www.unknowninsights.com/2012/06/india-growth-story-intact-interpreting.html">India’s Growth Story Intact: Interpreting macro numbers and trends the right way</a> <br /><a href="http://www.unknowninsights.com/2012/05/party-time-again-time-to-buy-panic-for.html">Party Time Again: Time to buy panic for the Sensex ride to 80,000</a> <br /><a href="http://www.unknowninsights.com/2012/05/rupee-fall-no-flight-of-capital-only.html">Rupee Fall: No flight of capital – only speculation</a></p></p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-78613824769590755832012-06-21T23:21:00.001-07:002012-06-21T23:21:39.648-07:00Oil, Commodities Down 25%: Recovery to pick up pace<p>The fact that oil and all major commodities are down more than 25% from about a year ago is an indicator that the recovery in the Indian economy is set to pick up the pace.</p> <p>My previous analysis suggested the <a href="http://www.unknowninsights.com/2012/06/india-growth-story-intact-interpreting.html">Indian long-term growth story is intact</a> and that a recovery is now underway from a short-term slowdown.</p> <p>Here are some of the latest news and data that reinforce my hypothesis:</p> <ul> <li>Corporate India has posted a robust top-line and bottom-line growth of around 20% for the March 2012 quarter. It would be ridiculous, nay insane, to consider a 20% bottom-line growth as a slowdown! </li> <li>FII remain long-term bullish based on equity inflows, with massive net inflows of Rs 17,000 Cr so far during 2012. There were net outflows in April and May of Rs 900 Cr and Rs 2,200 Cr, respectively, but the amounts are minuscule. In the current month to date, there have been net inflows of Rs 1,500 Cr. </li> <li>Here’s a <a href="http://www.ptinews.com/news/2708042_Kochhar--Kamath-say-India-story-intact-">PTI report</a> from a few days back, on what India’s top bankers had to say:  “<i>Amid a growing number of industry leaders expressing anguish over policy paralysis, top banker Chanda Kochhar has said that people are talking more about challenges while taking the positives for granted. Kochhar’s mentor and ICICI Bank Chairman K V Kamath has also sounded an optimistic note. In his latest letter to ICICI Bank shareholders, Kamath said he is confident about a ‘robust and sustained (economic) growth over the medium to long term.’ ”</i> </li> <li><a href="http://www.business-standard.com/india/news/jpmorgan-upgrades-indian-equities-to-039overweight039/175628/on">J.P. Morgan upgraded Indian equities to “overweight”</a> from “neutral,” despite acknowledging the risk factors facing the economy, encouraged by what it called a number of more positive factors including historic valuations. I usually don’t give much credence to reports from agencies like S&P, Moody’s, Goldman Sachs, Morgan Stanley and most others. However, J.P. Morgan India, under Kalpana Morparia, seems to have got the long-term trend right, even <a href="http://www.dnaindia.com/money/report_india-s-7-5pct-growth-forecast-healthy-jp-morgan_1201322">as far back as October 2008</a> when the markets were making a capitulation bottom. In September 2011, they had the courage to call the <a href="http://articles.economictimes.indiatimes.com/2011-09-16/news/30165388_1_iip-numbers-sajjid-chinoy-capital-goods">IIP numbers misleading</a> and take a stand that economic growth is not collapsing. Among the major global financial firms, J.P. Morgan is not just the first out of the blocks in acknowledging the strengths of the India story, but it has also made a bullish call when pretty much every other major firm has made a bearish call. That takes a lot of courage in the murky world of large and influential financial firms. </li> </ul> <p>As regards some of the negative news items, here are my thoughts:</p> <ul> <li>The news about Infosys delaying joining dates of freshers does sound disconcerting, but I won’t give too much importance to it for the time being. That’s because there could be reasons around timing and short-term bottom-line management behind staggering the dates. Furthermore, the fresher hirings at other top IT companies display no signs of a slowdown or staggering. </li> <li>The rupee’s fall is not driven by any capital flight <a href="http://www.unknowninsights.com/2012/05/rupee-fall-no-flight-of-capital-only.html">but by speculative selling</a>. The fall might continue a bit longer. However, I don’t expect it to have any significant impact on corporate profitability. </li> <li>The apparently poor year-over-year growth numbers for IIP and GDP are not a cause of worry. First, the numbers are not being interpreted correctly, surprisingly, even by senior analysts and economists. Second, given the government’s record around credibility of these numbers, they really can’t be relied upon too much. </li> </ul> <p>As suggested in my analysis last month <a href="http://www.unknowninsights.com/2012/05/greece-paranoia-blessing-in-disguise.html">Greece Paranoia: A blessing in disguise for India</a> and other analyses, here’s how I expect the next few quarters to play out:</p> <ul> <li>Inflation likely to keep falling. </li> <li>In a scenario where India’s consumption story is intact, falling inflation is likely to drive up real demand even further. </li> <li>A combination of rising demand and falling prices will result in Indian corporations continuing to post strong quarterly sales and profitability growth. </li> </ul> <p>The bottom line is that India’s long-term story is very well intact. Although we did go through a temporary slowdown, that also shows all signs of having ended with the recovery cycle well underway.</p> <u>Related Analyses</u> <br /><a href="http://www.unknowninsights.com/2012/06/india-growth-story-intact-interpreting.html">India’s Growth Story Intact: Interpreting macro numbers and trends the right way</a> <br /><a href="http://www.unknowninsights.com/2012/05/gdp-downgrades-be-wary-of-research.html">GDP Downgrades: Be wary of research house estimates; India’s growth story intact</a> <br /><a href="http://www.unknowninsights.com/2012/05/party-time-again-time-to-buy-panic-for.html">Party Time Again: Time to buy panic for the Sensex ride to 80,000</a> <br /><a href="http://www.unknowninsights.com/2012/05/hiring-salaries-going-up-wheres.html">Hiring and Salaries Going Up: Where’s the slowdown?</a> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-28086169015932150202012-06-21T22:40:00.001-07:002012-06-21T22:40:06.109-07:00When Moody’s Downgrades, Markets Rise!<p>What are the implications of the rating cuts of 15 banks by Moody’s on Thursday? </p> <p>Given the credibility and timing of Moody’s past forecasts, what the downgrades imply is that the U.S. economy is bottoming out and stock markets are likely to start on a bull run within the next few months in anticipation of a recovery!</p> <p>Take a look at Moody’s performance during the 2008 crisis.</p> <p>Moody’s downgraded Citibank by two notches in December 2008 and Bank of America and Wells Fargo by a notch each in March 2009. That was right at the bottom of the cycle, as Citigroup started posting positive results immediately after the downgrade and the U.S. markets started on a bull run in the first week of March after hitting a capitulation bottom.</p> <p>Now, if Moody’s had started with widespread downgrades in late 2007, that would have been some really admirable foresight. Keep in mind that economist Nouriel Roubni had come out with a very uncanny step-by-step analysis in 2006 of how the housing bubble would burst and the crisis would unfold. As for Moody’s, here’s what it had to say in a <a href="http://www.reuters.com/article/2007/08/17/banks-ratings-moodys-idUSN1746225020070817">Reuters update in August 2007</a>.</p> <p><i>“Moody's Investors Service on Friday said widespread rating downgrades are not expected for the world’s banks as a result of the current market turmoil. Third-quarter earnings will likely decline for a number of banks, however, and a handful of banks may be downgraded, Moody's said in a report. ‘We are unlikely to change bank ratings because of temporary liquidity problems,’ said David Fanger, a managing director at Moody's.”</i></p> <p>By the time Moody’s started with major downgrades, the recovery cycle had already begun.</p> <p>Here’s another point that dents the credibility of the current downgrades: Out of the 15 banks, 11 were downgraded by two or more notches. That’s ridiculous! Did a tsunami hit the U.S. that a sudden two-notch downgrade was required? No, nothing catastrophic has happened in the U.S. or the global economic scenario that would deserve an overnight two-notch downgrade. Issues around the temporary U.S. slowdown and the euro-zone crisis have been known for a while now.</p> <p>On the credibility side, take a look at what blogger Tyler Durden had to say around the current downgrades.</p> <p>“<a href="http://www.zerohedge.com/news/moodys-hammer-fall-4-pm?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29"><i>… CNBC</i></a><i>, which apparently is where Moody’s leaked all its data … . So ... this leaves Morgan Stanley with the dreaded 3 notch cut.”</i></p> <p>“<a href="http://www.zerohedge.com/news/here-we-go-moodys-comes-out-morgan-stanley-cut-only-2-notches?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29&utm_content=Google+Reader"><i>And there you have it</i></a><i> – the reason for the delay were last minute negotiations, most certainly involving extensive monetary explanations, by Morgan Stanley’s Gorman (potentially with Moody’s investor Warren Buffett on the call) to get only a two notch downgrade. And Wall Street wins again.”</i></p> <p>Here’s what <a href="http://www.zerohedge.com/blogs/rcwhalen">Christopher Whalen, of Tangent Capital, had to say</a>: <i>“Watching the latest move by Moody's to downgrade various global banks, one can only be impressed by the lagging nature of the major ratings agencies’ financial prognostications.”</i></p> <p>Again, I don’t mean to pick on Moody’s. It’s just that this was the latest news. In fact, my previous analysis suggests that firms like S&P, Morgan Stanley and Goldman Sachs are all in the same boat as far as credibility of their ratings and reports are concerned. </p> <p>My analysis further suggests that global economies are in various stages of bottoming out and recovery. With S&P and Moody’s downgrades starting to come in, it further confirms the bottoming out scenario and a high possibility of stock markets breaking out upward in the next few months. </p> <u>Related Analysis</u> <br /><a href="http://www.unknowninsights.com/2012/06/be-wary-of-s-ratings.html"><b>Be wary of S&P ratings</b></a><b></b> <br /><a href="http://www.unknowninsights.com/2012/05/be-wary-of-marc-fabers-public-forecasts.html"><b>Be wary of Marc Faber’s public forecasts</b></a><b></b> <br /><a href="http://www.unknowninsights.com/2012/05/global-recovery-robust-part-ii.html"><b>Global recovery robust – Part II</b></a> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-43344714117424294702012-06-13T11:29:00.001-07:002012-06-13T12:02:06.404-07:00Interpreting IIP Numbers the Right Way<p>India’s growth story is very much intact so far, even as IIP has posted 0.1% YoY growth. It won’t make a difference even if IIP posts negative YoY numbers for a few more months.</p> <p>Refer to my earlier analysis regarding the way looking at YoY numbers is not always the right way to interpret macro trends. The right way to look at the GDP and IIP numbers is to simply look at a chart of absolute IIP and GDP over time. Furthermore, one has to differentiate between a long term trend short term business cycles.</p> <p>Take a look at the chart below of IIP numbers for the past seven years along with a 12 month moving average. As can be seen from the chart, the long term uptrend is intact, and is comprised of many ups and downs as part of regular business cycles.</p> <p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjx76xCOcJ6R5IDzSlLsC73jPOz__IFUUGXJJOPdzxte8Hl1gCotWUTx5HSyI4qEFMTAydW9lOlNbTJIiQjJyflNWHvTKIQw2yUR5j_4IWg5L94zGcoNubzuMk-YQvRWifEQn98f3j-fvk/s1600-h/image%25255B3%25255D.png"><img style="border-bottom: 0px; border-left: 0px; display: inline; border-top: 0px; border-right: 0px" title="image" border="0" alt="image" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIrbNofr7dv-f3D52DOn8GQy29CYhgi-0v0XeQrmPR-ACSCLJwFJmha8NEKNFWl1Sf3SVWpqwXmFqPrs9dRwLgylS1koD-NH18FKWcRlaOh78uMnI6dEahMydwLPGh_PiX-4o5YZ6hGBo/?imgmax=800" width="371" height="227" /></a> <br /></p> <p>Keep in mind that IIP was posting negative YoY numbers during April - June 2009 even as corporate profitability was improving and markets were making new highs. In fact, the IIP YoY % were posting very flattish trends until Oct 2009. During this same time period Nifty more than doubled from 2500 levels to 5100 levels!</p> <p>As for S&P, as per my previous story, one has to be wary of their reports and ratings. In 2009 they had downgraded India’s sovereign rating just three months before the markets did an upward breakout and growth numbers turned around!</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-3235036925974981272012-06-11T19:36:00.001-07:002012-06-11T19:36:56.359-07:00Pranab is right<p>Pranab Mukherjee has given statements in press saying that S&P report is not based on fresh rating action, and that there would be a turnaround in country’s growth prospects in coming months.</p> <p>I believe him to be right. My analysis shows that <a href="India’s Growth Story Intact: Interpreting macro numbers and trends the right way" target="_blank">India growth story is intact</a> and the gloom and doom scenarios being painted is due to inability of analyst’s to interpret numbers correctly, and an undue focus on business cycles at the cost of long term trend.</p> <p>As for S&P, as per my previous story, one has to be wary of their reports and ratings. In 2009 they had downgraded India sovereign rating just three months before the markets did an upward breakout and growth numbers turned around !</p> <p>India’s growth story is no thanks to the current government, but is a tribute to a basic resilience and the underlying growth momentum of Indian economy itself.</p> <p>India growth story is intact, not because of government action, but notwithstanding government inaction !</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-9609820724649074122012-06-11T19:11:00.001-07:002012-06-11T19:11:54.316-07:00Be wary of S&P ratings<p>Here`s an extract from a news item dated Feb 2009 : <br /><em>"S&P lowers India’s sovereign rating : MUMBAI: Standard & Poor’s Ratings Services on Tuesday revised the outlook on the long-term sovereign credit rating on the Republic of India to negative from stable”</em></p> <em></em> <p> <br />Two months later, in April 2009 markets did a breakout move. And since then India GDP has grown by nearly 30% (Rs 1.08 lac crore in Dec 2008 quarter to 1.39 lac crore in March 2012 quarter)</p> <p> <br />S&P is Lehman tainted. They were assigning Triple A ratings to real estate CDO`s and other derivatives even as the housing markets were crashing. In the grand jury hearings, one of the excuses they gave for unjustifiably high ratings - Excel error !</p> <p> <br />If you are interested in some solid long terms analysis, the right source are Rakesh Mohan`s interview on Moneycontrol , Rakesh Jhunjhnwala interview on ET, RBI research papers and other such sources, not the reports from S&P`s, Morgan Stanley`s and Goldman Saches of the world.</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-12621298611065399692012-06-09T11:58:00.001-07:002012-06-09T20:29:36.854-07:00India’s Growth Story Intact: Interpreting macro numbers and trends the right way<p>There has been a lot of debate about India’s growth story coming to an end, with many top brokerages like Morgan Stanley and Goldman Sachs cutting GDP forecasts to sub 6% levels. However, my analysis shows India’s growth story is not only intact, it continues on a robust path.</p> <p>The gloom-and-doom scenarios being painted today are an exact repeat of the phenomenon that happened during 2008-09 when the debate started that India’s growth story might be over and the Morgan Stanleys and Goldman Sachses of the world cut the GDP forecast for FY10 to sub 6% levels and some to even sub 5% levels.</p> <p>What happened next?</p> <p>In FY10, India posted a GDP growth rate of nearly 8%!</p> <p>So what went wrong with all the doomsday scenarios for India? Two things went wrong. </p> <p>First, an undue importance was placed on year-over-year (YoY) growth rates without looking at the trend in absolute GDP. That’s a simple number interpretation issue. A case in point is all the gloom surrounding the sub 6% YoY growth rates posted in the last two quarters of fiscal 2008-09 and the latest 5.3% YoY growth posted for the March 2012 quarter.</p> <p>Second, not looking at the long-term trend and the impact of business cycles. That’s an economic analysis issue. Take a look at the chart below. I have compared the trend in absolute values of India GDP with that of U.S. GDP since 2005. I have compared just the India and U.S. trends in order to clearly explain how long-term growth rates and business cycles need to be interpreted. To facilitate a comparison, I have indexed the GDP values by initializing the starting values to 100. </p> <p><a href="file:///C:\Documents%20and%20Settings\Amar\Local%20Settings\Temp\WindowsLiveWriter-429641856\supfiles138B45E\image3.png"><img style="border-bottom: 0px; border-left: 0px; display: inline; border-top: 0px; border-right: 0px" title="clip_image002" border="0" alt="clip_image002" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAVoKSRgao0qSddjqLcHtObzHGRWbnNPRM0lu_w-_ssc5s3m1Rz76EWjO4C3nqHZhKR4w6TQAOKkFl0BW2uZALfVw3uKl06XzDed-F67PwtSAa24zoeQ493BkC-aWvF87DL9rQM2Kzr_Q/?imgmax=800" width="244" height="151" /></a></p> <p>As you can see, the chart speaks for itself. The trend in U.S. GDP is like a straight line, having grown only a total of 7% in the past six years. India GDP, on the other hand, is on a strong uptrend, having grown more than 80% in the same period. Within this long-term trend, the ups and down of a normal business cycle can clearly be seen. </p> <p>Understanding long-term trends and business cycles, more often than not, does not need complex models. Most of the time simple charts and a bit of common sense work well enough. For those who would rather look at complex models, the RBI website is the right source, not brokerage research reports. There is some fantastic analysis available on the RBI site, the summary of which is that a growth rate in the 8% range is now the new normal.</p> <p><u>Current Economic Problems: More imagined than real</u></p> <p>The U.S. economy faces some structural issues, which are very real. Meanwhile, in India, the challenges to the long-term growth trend are more imagined than real. </p> <p>The problems facing the Indian economy today are more tactical and cyclical rather than of a strategic or long-term nature. It’s not as if everything is hunky dory – no it’s not. There are challenges around fiscal deficit, current account deficits, governance and reforms. But all these challenges have pretty much existed for the past six years during which the economy continued to grow at a very healthy rate. </p> <p><u>So, Is India’s Growth Story Intact? </u></p> <p>As of now, yes.</p> <p>As the chart clearly shows, the long-term trend in India GDP is fully intact and issues like the slowdowns in 2008 and 2011 are simply the business cycle playing itself out.</p> <p>So, is there nothing that can derail the growth story? Of course, there are many factors which can do so. But it’s only major structural changes that can derail India’s growth story, things like a significant fall in competitiveness in services exports, a rollback of reforms and such like. Not factors like dollar volatility, oil prices and minor variances in fiscal deficit.</p> <p>India has continued to grow at a steady pace for six years, a period characterized by a slowdown in reforms, the Lehman meltdown, dollar volatility, high fiscal deficits, high food prices and what not. Factors like these have only caused the normal ups and downs of a business cycle in India, and I forecast that they would only cause normal business cycles going forward, too.</p> <p><u>So, What Happens Next?</u></p> <p>In the next phase of India’s business cycle, the continuing drop in commodity prices, oil prices and interest rates will speed up the recovery process. Corporate profitability, which has already improved significantly, would post some handsome growth numbers. All these would result in a continuing GDP uptrend. </p> <p>---------------------------------------------------------------------------</p> <p><em><u>Related analysis</u></em></p> <p><a href="http://www.unknowninsights.com/2012/05/53-gdp-numbers-not-being-interpreted.html"><em>5.3% GDP: Numbers not being interpreted correctly; recovery is intact</em></a><em> </em></p> <p><a href="http://www.unknowninsights.com/2012/05/gdp-downgrades-be-wary-of-research.html"><em>GDP Downgrades: Be wary of research house estimates; India’s growth story intact</em></a></p> <p><a href="http://www.unknowninsights.com/2012/05/party-time-again-time-to-buy-panic-for.html"><em>Party Time Again: Time to buy panic for the Sensex ride to 80,000</em></a></p> <p><a href="http://www.unknowninsights.com/2012/05/hiring-salaries-going-up-wheres.html"><em>Hiring and Salaries Going Up: Where’s the slowdown?</em></a></p> <p><a href="http://www.unknowninsights.com/2012/05/greece-paranoia-blessing-in-disguise.html"><em>Greece Paranoia: A blessing in disguise for India</em></a></p> <p><a href="http://www.unknowninsights.com/2012/05/iip-shows-recovery-not-contraction.html"><em>IIP Shows Recovery, Not Contraction</em></a></p> <p><a href="http://www.unknowninsights.com/2012/05/test.html"><em>Recovery Underway: Fears unfounded</em></a></p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-753780690623534052012-05-31T11:19:00.001-07:002012-05-31T11:19:38.863-07:005.3% GDP : Numbers not being interpreted correctly, recovery is intact<p>The latest GDP number of 5.3% caught many people, including myself, by surprise. Looked at in isolation, this number does sound very disappointing and many analysts and economists have been quick to come out with comments on how the India growth story is probably over and how the government is killing growth.</p> <p>In fact, here’s what an <a href="http://economictimes.indiatimes.com/news/economy/indicators/gdp-at-5-3-india-now-a-gasping-elephant-says-hsbc/articleshow/13690674.cms">ET story had to say</a>: <em>“HSBC labelling the nation as a ‘gasping elephant’ while Credit Suisse said latest numbers will send ‘shivers down’ the spines of coalition politicians of ruling UPA.”</em></p> <p>However, when interpreted the right way and along with other macro numbers, the GDP numbers actually show that the recovery process is intact and the economic growth engine is chugging along just fine. </p> <p>And this conclusion assumes that the GDP numbers don’t get revised upwards. The credibility of our government for data accuracy is a bit suspect given the numerous mistakes detected in the past with IIP, exports and the GDP numbers themselves.</p> <p>The right way to look at the quarterly GDP numbers is to simply look at a chart of GDP (in Rs Cr) over time. Take a look at the chart below. What does it show? That the economic growth engine is chugging along just fine or that the economy is trouble? I rest my case.</p> <p> </p> <p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGR-e_29rEWLBQn80u57cVSLgh4Pe4arQ5Z_iOXC0lR-Son31b4jouCrCZsLZoHVqPpxMvI5zy-nv7-3KBo6XWtqse7o50ncZE0Pz4GHVgu19RM_3Yn3gqk7zRglXhnn2DXJuz15d0q3A/s1600-h/image%25255B3%25255D.png"><img style="border-bottom: 0px; border-left: 0px; display: inline; border-top: 0px; border-right: 0px" title="image" border="0" alt="image" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiroPg7YpNjSH-i6HS1wFz_3hM9Cz5dwxsia9WnPIefsQPKsqKwra7jw3sy4KiOEFVL1H5WS9dZL84jby98uDriMEZruw_9YKxSwsQoKwTKXTw4tNbwWwQwyYvZ7S-5-lWpYc5dLKPopWw/?imgmax=800" width="341" height="209" /></a> </p> <p>It’s not always right, and sometimes outright dangerous as in this case, to draw conclusions based on a single year-over-year growth number. This apparently low 5.3% growth number is driven by the high base effect of the last two years, when there was a growth spurt after the 2008 slowdown.</p> <p>In my previous analysis, I argued that the <a href="http://www.unknowninsights.com/2012/05/test.html">recovery process as well as the India growth story is intact</a>. Does it mean that we are back on a high-growth path and that everything is hunky-dory? No, not at all. The pace of growth is no doubt slowing down and there are concerns around a possible rupee fall, inflation and fiscal deficit. </p> <p>However, there is nothing at all alarming in any of the macro numbers declared so far. All that is happening is that we are going through a very normal business cycle. After a burst of growth in 2009-10 and 2010-11, the economy is taking a breather, so to say. The economy continues to grow, but at a slower rate.</p> <p>What about the negative growth rate in the manufacturing sector? Refer to my analysis of the latest IIP numbers for April 2012 which came in at minus 3.5%, year over year.  I had shown how the <a href="http://www.unknowninsights.com/2012/05/iip-shows-recovery-not-contraction.html">IIP numbers actually show a recovery taking place and not a contraction.</a> It’s the same case with the manufacturing sector. It continues to grow, but at a slower pace.</p> <p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbGkPNwf7Vq_8VXPHyPEIrax_RP7_lPMD2bSpm0iWofnANKcBuxfo8xEcAo5nAWZ6TzndQLVddLqStaR97yd_SDCnvsvxYW9eYg9P3x_Sj_44RG-k0we3-IsPmxt_tNmlH_ngoAd9XXMs/s1600-h/image%25255B8%25255D.png"><img style="border-bottom: 0px; border-left: 0px; display: inline; border-top: 0px; border-right: 0px" title="image" border="0" alt="image" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJJyDhQ74uf2-WvXGwAxrdul6CoNImYloPXhAVj4BxMd72NGr3_YAhOPmYrEe7kXmmYkPoXrG97CwjvQkt7h_9zaKPqFspLyqrBqmmLnj6-2YaJ8nkW8CFUFqSUZZUENQg3RfGPSCPKso/?imgmax=800" width="331" height="208" /></a> </p> <p>One of the strongest indicators of growth is the corporate profitability numbers which have been showing a steady rise for the last two quarters. This strength in the corporate sector is borne out by double-digit salary hikes, good bonuses, increases in hiring and high attrition rates, which are indicators of an expanding economy, not signs of a moderating economy. Going forward, the fears and paranoia surrounding a possible Greece exit and other global issues are likely to prove to be a blessing in disguise for India because of the impact on commodity prices and inflation. </p> <p>The bottom line is that the economy went through a moderation phase in the second half of 2011, is now on a recovery path and is very likely be able to maintain growth rates in the 8% range, governance and reform issues notwithstanding. </p> <p>I’ll end this one with a nice quote on data analysis I came across sometime back. <em>“Conducting data analysis is like drinking a fine wine. It is important to swirl and sniff the wine, to unpack the complex bouquet and to appreciate the experience. Gulping the wine doesn’t work.”</em> Daniel B. Wright (2003).</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-33362989994460062462012-05-26T07:13:00.001-07:002012-05-26T07:13:02.515-07:00GDP downgrades: Be wary of research house estimates - India growth story intact<p>I came across a slew of reports, where major research house, including the likes of Goldman Sachs and Morgan Stanley are reducing their 2013 GDP growth estimates to less than 7%, in some cases these have been reduced to around 6.5% </p> <p>Here’s the key point to note - These research house reports are not meant for use by retail/ long term investors and going by past trends, Goldman and many other would very likely get their 2013 estimates horribly wrong, due to a clear bias towards overestimating negative impact. </p> <p>Their primary audiences are fund managers, who need to hit their benchmarks every month. India growth story is very well intact and in-fact reiterated by these very same research houses in some of their other reports. The audience and purpose of these quarterly / yearly kind of estimates is very different. </p> <p>Here're how accurate Goldman and Morgan have been in past. </p> <p><u>FY10 Actual GDP around 7.9% </u></p> <p>Goldman Sachs April 2009 Estimate - 5.8% </p> <p>Morgan Stanley April 2009 Estimate - 4.4% </p> <p><u>FY12 Acutal GDP around ?? (it'll probably come in around 6.9%)</u></p> <p>Goldman Sachs Dec 2010 estimate - 8.70% </p> <p>To give them credit, they have been accurate too sometimes, but there is no consistency. However, as far as overall accuracy of projections goes, they have a hit rate around 50%. That's more like a coin toss. Every expert would be wrong a certain percentage of the time, and that's to be expected as projections are probabilistic estimates and not crystal ball gazing. But a 50% hit rate doesn't really inspire too much confidence. </p> <p>Again, I don't mean to rubbish these kind of estimates, but they are meant for a different audience and a different purpose, and not really meant for a retail investor. </p> <p>My detailed analysis’ posted over past few months, shows that India growth story is intact. Key points summarized below:- </p> <p>- Double digit salary hikes, increases in hiring and high attrition rates are indicators of an expanding economy, not signs of a moderating economy. </p> <p>- My analysis of IIP data showed how the numbers are not being interpreted correctly. IIP numbers are actually tracing a pattern of recovery, not a contraction. </p> <p>- Quarter on Quarter corporate profit growth till Dec’11 has shown an uptick. Trend is expected to continue with the March’12 results too. </p> <p>- The fears and paranoia surrounding Greece exit is likely to prove to be a blessing in disguise for India, via its impact on commodity prices and inflation </p> <p>- The transaction patterns of FII’s seem to show that overall they continue to remain bullish. There has been no exodus, even though they have been net sellers. Overall, for the whole of 2012, FII’s have been net buyers to the extent of Rs 38000 Cr, while being very minor sellers in April (Rs 1600 Cr) and May (till 24th May -Rs 1600 Cr). </p> <p>My analysis shows that India growth story is intact, and after a strong bounce in the economy post 2008, we went though a dip in 2011, that dip has ended and we are now on  the next leg of recovery.</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-72485262793012331722012-05-26T07:08:00.001-07:002012-05-26T07:08:26.646-07:00Be wary of Marc Faber’s public forecasts<p><a href="http://www.moneycontrol.com/news/fii-view/marc-faber-warns-100-chanceglobal-recession_709490.html">Here’s what Marc Faber is reported to have said in an interview in CNBC and reported in MoneyControl</a>.com</p> <p>“I think we could have a global recession either in Q4 or early 2013." When asked what the odds were, Faber replied, "100%."</p> <p>Marc Faber interviews are a must read for the many fresh perspectives they offer, however be wary in relying too much on his projections, as the overall accuracy of his projections is at around the 50% level. This is also true for many other Gurus by the way. </p> <p>I love reading Marc Faber interviews. He's one of those folks who don't pull their punches. He has strong opinions and I have always found some new perspective in each one of his interviews. In this same CNBC interview, his point of view is that a Greece exit is likely to be bullish for markets - that's a beautiful point and well supported by the bond market behaviour too. </p> <p>However, as far as overall accuracy of projections goes, they have a hit rate around 50%. That's more like a coin toss. Every expert would be wrong a certain percentage of the time, and that's to be expected as projections are probabilistic estimates and not crystal ball gazing. But a 50% hit rate doesn't really inspire too much confidence. </p> <p>Let me clarify - I don't really doubt his ability to make money, based on what I read in the media. My focus is only on the projections that he gives out publicly. </p> <p>By the way, he does not have any shortage of correct forecasts - he did call the 2008 crash and the ongoing correction accurately; however I couldn't find any level of consistency over a period of time. </p> <p>Here are excerpts from some of his interviews - (I have restricted my self to reports published in Moneycontrol only for now, but over a period of time I have carried out many internal reviews for self consumption, for many gurus, over many publications).</p> <p><strong><u>What he said about US markets (March 2009): </u></strong><b><u> <br /></u></b>"But I don't think that right now we will make new lows before 666 levels. We may have a rally until the end of April and a total collapse at the end of the year, when it becomes clear that the economy is a total disaster." </p> <p><u>What actually happened</u>: US markets went on a bull run and the US economy posted a strong economic recovery. </p> <p><strong><u>What he said about China (March 2009)</u></strong><b><u> <br /></u></b>”I think it is out of the question that China will grow by 8% this year. In fact, I don't think it will grow at all. I think the Chinese economy is in recession.”</p> <p><u>What actually happened</u>: This was one of his more outrageous statements. I am not sure that he actually believed what he said and maybe it was said in jest. I mean, China has never posted an annual GDP growth rate of less than 10% for the past decade at least. </p> <p><strong><u>What he said about global recovery (May 2009) </u></strong><b><u> <br /></u></b>"My sense is that the markets will correct now and they will correct for a variety of reasons partly because it will become obvious that the global economic recovery is not very strong or not taking place at all." </p> <p><u>What actually happened:</u> There was a strong global recovery, with US and emerging markets leading the way. </p> <p><strong><u>What he said about India (May 2009). </u></strong><b><u> <br /></u></b>"But in general in the case of India we went from less than 8,000 to 14,000. I wouldn't be surprised to see something like 10,000-12,000 in a correction but maybe it won't happen. All I am saying is the risk reward today of buying equities is obviously not as favourable as it was in March." </p> <p><u>What actually happened:</u> The Indian market went up by more than 50% in the next one year. </p> <p><strong><u>What he said about India (June 2009) India </u></strong><b><u> <br /></u></b>"There is little potential to grow very strongly. So, there will be disappointments in terms of earnings in the second half of 2009. The gravy is a bit out of markets. India was below 8,000 on the Sensex and has gone up almost 100%. I don't think it is a very good time to make an entry into the markets except for traders.” </p> <p><u>What actually happened:</u> The gravy was still there in Indian markets, as it went up by more than 50% over the next one year. </p> <p><strong><u>What he said about the financial crisis (Oct 2009) </u></strong><b><u> <br /></u></b>"So, I think enjoy your ride in asset classes as long as it lasts but I think we are seeding the next crisis and it may happen in the next three months, maybe tomorrow, maybe five years, maybe only in 10 years" </p> <p><u>What actually happened:</u> Is there really anyone out there who believes that there won’t be any crisis in the next 10 years?? </p> <p>In summary, do read his interviews for the many new perspective that they have to offer, but be wary of his publicly made forecasts.</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.comtag:blogger.com,1999:blog-2644334932456147860.post-21105122786609238482012-05-24T12:13:00.001-07:002012-05-24T12:13:59.275-07:00Party time again: Time to buy panic for the Sensex ride to 80000<p>With fear starting to take over the stock markets on one hand, and recovery in the Indian economy progressing well on the other, this seems like a party time for professional investors to accumulate equities. After a great accumulation opportunity towards the end of last year, it seems Mr Market is offering another one on a platter.</p> <p>I continue to stand by my <a href="http://www.unknowninsights.com/2008/03/sensex-10k-in-one-year-and-80-k-in.html">forecast of Sensex reaching 80K (min 45K) by 2016</a>. I made the first version of that forecast in March 2008 and have not yet seen any reasons to revise it. In fact, as part of the same forecast, I had also projected that we would go through a major bear market first, before the ride to 80,000 begins. The subsequent bear market and the lows made in October 2008 are, of course, now history.</p> <p>Coming back to the present, markets are likely to continue to be spooked by the Eurozone and Greece’s minuscule economy, providing some great entry opportunities.</p> <p>Investing literature, and quotes from the likes of Warren Buffett, are full of descriptions for times like these. The one I like is “Buy fear, sell greed,’’ although I don’t remember who said it (probably Buffett).</p> <p>And this, to me, seems like one of those times to buy fear. </p> <p>Take a look at the following charts of P/E and IIP data for the past six years. P/E’s are already in the undervalued zone and are about to enter the extreme undervaluation zone. Meanwhile, the IIP seems to be northward bound, as if the sky is the limit.</p> <p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOlT3jsea3rzoOJ4U6XbL2Dmvk-dF90ZvhadC0YLCGVz_Ov_6X-pBwWgmQhR_E0kOwVI8EAF15s9S8xRZxp0jReqHo5ey0q-Lo6HeFqtZY-dehUz3cJ266ZxSkiBXS1gXP0CS9W1yAefM/s1600-h/image4.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="image" border="0" alt="image" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhSA4wS3j__VvuFMGL-mH7YsX2SCh31EAVOTDXpuNfarqhk7ua6TL296iplg44vX_sa8j110fF0MKh747RPTn5L6E_0UtD1c6wRWEYZ-_Jtg6gz3bwjXl9HPT1koWV0sFoKOIY2tE-vacs/?imgmax=800" width="356" height="215" /></a> </p> <p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAf2xKnmVpPRJn3z2rAdKN35b3wwroOysT8DkdShHMaoYuKOkrB5q7Fxn0b2x6ia8xvtNiwKKXPxENKr6pU1GvejK9GwW2SVsQHlEESgou3gofVIYJJsCmVCR-9UMbeotBvGi8lKozXl4/s1600-h/image8.png"><img style="border-right-width: 0px; display: inline; border-top-width: 0px; border-bottom-width: 0px; border-left-width: 0px" title="image" border="0" alt="image" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2Mvd0_UuUs_JEnV8EyAtluK6dp4NOWgSFnsFqIXXt4EGY9LVhXH11J74wJZ7LOn4u6Lcv-epLxYzSTj87zxbEWAONUuQTWvzJCN18MVvk4L6V3UCw_S7jvRTYmE_it1Aukyg_jm5YGN8/?imgmax=800" width="356" height="218" /></a> </p> <p></p> <p></p> <p>And what about global markets? Well, I believe the long-term professional investor must be looking at a time frame of seven years or more. In that time frame, does it make a difference whether the Eurozone remains or melts down, let alone Greece?</p> <p>Even from a short-term perspective of the next year or so, my analysis shows that <a href="http://www.unknowninsights.com/2012/05/us-china-eurozone-pmi-drops-global.html">global recovery is intact</a>. This notwithstanding the latest PMI numbers for the U.S., China and the Eurozone released today, which on a superficial basis might cause further fear. A deeper analysis reveals the recovery is intact.</p> <p>Coming back to the projection of 80,000 (minimum 45,000) for the Sensex, that number, is really not that terribly large, if we keep in mind that the Sensex was at around 3,000 just a decade back and at around 6,000 about seven years back. As for growth estimates, I am not even banking on a 10% range of GDP growth and a 20% range of EPS growth. My growth estimates are far more conservative, but that is probably better covered in another story.</p> <p>I’ll end this story with another one of those nice quotes: “What we learn from history is that people don’t learn from history.”</p> Amar Harolikarhttp://www.blogger.com/profile/01385164336335795215noreply@blogger.com