Saturday, May 26, 2012

GDP downgrades: Be wary of research house estimates - India growth story intact

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%

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.

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.

Here're how accurate Goldman and Morgan have been in past.

FY10 Actual GDP around 7.9%

Goldman Sachs April 2009 Estimate - 5.8%

Morgan Stanley April 2009 Estimate - 4.4%

FY12 Acutal GDP around ?? (it'll probably come in around 6.9%)

Goldman Sachs Dec 2010 estimate - 8.70%

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.

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.

My detailed analysis’ posted over past few months, shows that India growth story is intact. Key points summarized below:-

- Double digit salary hikes, increases in hiring and high attrition rates are indicators of an expanding economy, not signs of a moderating economy.

- 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.

- Quarter on Quarter corporate profit growth till Dec’11 has shown an uptick. Trend is expected to continue with the March’12 results too.

- 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

- 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).

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.