Unknown Insights: Oil, Commodities Down 25%: Recovery to pick up pace

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.

My previous analysis suggested the Indian long-term growth story is intact and that a recovery is now underway from a short-term slowdown.

Here are some of the latest news and data that reinforce my hypothesis:

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!
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.
Here’s a PTI report from a few days back, on what India’s top bankers had to say: “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.’ ”
J.P. Morgan upgraded Indian equities to “overweight” 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 as far back as October 2008 when the markets were making a capitulation bottom. In September 2011, they had the courage to call the IIP numbers misleading 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.

As regards some of the negative news items, here are my thoughts:

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.
The rupee’s fall is not driven by any capital flight but by speculative selling. The fall might continue a bit longer. However, I don’t expect it to have any significant impact on corporate profitability.
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.

As suggested in my analysis last month Greece Paranoia: A blessing in disguise for India and other analyses, here’s how I expect the next few quarters to play out:

Inflation likely to keep falling.
In a scenario where India’s consumption story is intact, falling inflation is likely to drive up real demand even further.
A combination of rising demand and falling prices will result in Indian corporations continuing to post strong quarterly sales and profitability growth.

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.

Thursday, June 21, 2012

Oil, Commodities Down 25%: Recovery to pick up pace