Enviable score card of Raghuram Rajan and Narendra Modi
Indian equity market shifted into top gears since RR taking charge at the RBI. The results are there to speak; evident from the start of euphoric rally since August 2013. NIFTY is up by 66% (from 5471 to 9119) and Bank NIFTY up by whopping 150% (from 8366 to 20907), given RBI's direct responsibility over the banking system. NaMo impact was felt immediately after announcement of elections in February 2014. There were signs of INC giving up the fight, leaving the stage to NaMo led BJP. The end result exceeded expectation, giving clear majority to BJP in the Lok Sabha. The rally since February 2014 was at faster pace, thanks to NaMo factor; NIFTY up by 53.7% (from 5933) and Bank NIFTY up by 110%). It is indeed tremendous wealth creation for Corporate India and (domestic and foreign) investor community! Are we in for more?
Luck complementing the hope and optimism on Rajan and Modi
Supporting the domestic hope and optimism are the luck factors from external environment. The biggest trigger was the sharp decline in imported items, which constitute more than 50% of India imports. Lots have been discussed on the beneficial impact from sharp decline in Brent Crude from $115 to $45 and fall in Gold price from $1433 to $1135 during this period since August 2013. These favourable price movements put behind the worries on Current Account Deficit, Inflation and subsidisation of fuel cost, all leading to significant improvement in Fiscal Deficit. Rajan did an excellent job in exchange and interest rate management, which not only pulls-in external appetite, but also provides significant cost advantage for Indian companies to access off-shore markets for funds, thus diluting the pressure on domestic liquidity. Rupee recovery from 68.85 to 58.33 followed by stability at 60/61-63/64 is boon to foreign investors and domestic importers & foreign currency borrowers. Rajan also cut the volatility in interest rates to control the spike in 10Y Gilt yield from above 7% to over 9%; since then, it has been steady recovery below 8% for stability at 7.60-7.85%. More importantly, Rupee emerged as the strongest currency; despite sustained bullish momentum on DXY from 79-84 to over 100 during this period, Rupee withstood the strong headwinds with rock-solid stability, thanks again to Rajan for handling this with exhibition of confidence and physical intervention, both ways. All taken, global investors have stood to gain a lot during this dream run since August 2013. No surprise that the risk of sovereign rating downgrade in 2013 has turned to expectation of reward through upgrade in 2015.
Optimism in tact, euphoria at peak lead to profit-booking
The sharp reversal in March 2015, post the surprise delivery of 25 bps rate-cut on 4th March has shocked many, if not all! While the correction is in order given the reality that valuation from here shall be shallow (on huge lift of base), the 10% fall in 3 weeks caught many on the wrong foot. In the short term time frame, it is not good to see the 3 month valuation build-up getting unwound in 3 weeks; but, taking medium/long term time frame (from August 2013 - February 2014 to present), it is not very alarming. The cry is largely from short term traders, and not from long term investors!
There is nothing to dilute India optimism when external stakeholders are positive, giving time to build scale over the set firm base. India macroeconomic fundamentals is seen in evolution stage to be one of the best in view. The set FY16-FY19 targets on GDP growth at 8-10%, Inflation at 4-6%, Fiscal Deficit at 3-4% and CAD at 0.5-1.5% is to the delight of external investors, lenders and rating agencies. The global manufacturing enterprises see India opportunities to build scale on their balance sheet against growth depression in developed economies and emerging markets. India balance sheet has huge upside potential given the expanded geographical coverage, huge consumption population against job & wealth creation and enhanced focus on infrastructure to build linkages for expansion in manufacturing and agriculture sectors. The inclusive social agenda will squeeze the bottom of the pyramid to put monies in their hands for consumption and savings.
There is nothing to worry from FED shift from neutral to hawkish monetary policy stance, when other major economies (Euro zone, Japan and China) are expected to stay in extended ultra-dovish monetary policy stance through 2016-2017. The price valuation has already adjusted to this fear, but nothing to panic beyond here. The dilution in growth-inflation conflicts and twin-deficits not at risk on exchange and interest rate, there are no reasons to doubt monetary dynamics turning growth supportive. It is a matter of time for shift of domestic liquidity from deficit to surplus, thus shifting the operating policy rate from Repo to Reverse Repo rate.
Correction although swift, it is good for base adjustment for next round of valuation build
NIFTY at 9000-9150 and Bank NIFTY at 20650-21000 was seen as "hot-to-hold" zone for correction to "cheap-to-acquire" zone of 8450-8600 and 18250-18750. The set hot-to-hold zone turned out to be too hot despite 4th March rate-cut, pulling the need to review and set "fair-value" zone in NIFTY at 8200-8300 and Bank NIFTY at 17500-17750, allowing maximum correction of 10% in NIFTY (from all-time peak of 9119) and 15% correction in Bank NIFTY (from all-time high of 20907). While Bank NIFTY has given up intra-2015 rally (into striking distance of mid-Dec'14 low of 17502), NIFTY held below 2014 close of 8282 not far away from intra-2015 low of 8065 and mid-Dec'14 low of 7961.
NIFTY did recover from 8269 for close at 8341 (so is Bank NIFTY from 17719 with close at 18044), but there is no confidence as yet whether the set fair-value zone of 8200-8300 and 17500-17750 can withstand current bearish momentum? Is the recovery already in process or in sell-on-recovery mode searching for cheap-to-acquire zone, now seen at 7965-8065 in NIFTY and 16350-16500 in Bank NIFTY. The relief is that there has been dilution in sentiment from bearish to neutral at set fair-value zone, but comfort and confidence for shift to bullish undertone is in doubt. The trigger for this shift would emerge from passage of Land Reforms bill and bringing life to infrastructure sector. The investor (and lender) appetite is positive; concerns are from delay in shift from risk-off to risk-on. There is plenty of domestic liquidity (invested in risk-off Gilts and non-financial assets) and huge pipe-line external liquidity. The reduction in cost of capital (equity and debt) is work-in-progress.
NIFTY has minor resistant ahead at 8390-8405 and 8450; beyond here, will cut the bearish momentum for risk-neutral recovery into 8625-8800/8850. At this stage on shift into FY16, there are no major cues to look for extended correction below 8269 into 8210-8235, seen as make-or-break point to prevent overshoot to 7965-8065 (cheap-to-acquire zone). It is prudent to stay risk-neutral at 8200/8275-8550/8625 and await clarity in April to set up the bullish tone for 8850-9150.
Bank NIFTY recovery from 17500-17750 is impressive, relative to NIFTY. It twice failed below 17750 (at 17729 and 17719) for close at 18044; minor resistance zone ahead is 18350-18500 with set up of bullish momentum over 18750 for 19350-19500, while risk below 17500-17750 may find solid support at 16350-16500, seen as cheap-to-acquire zone. If all goes well, Bank NIFTY will be the lead engine to pull other sectors.
All taken, while traders may stay worried on lack of clarity on sustainable directional bias, long term investors who are staying put since August 2013 - May 2014 have no reasons to get panic and can see this steep correction to increase book size. For those who missed the euphoric rally since August 2013, it is dream-come-true opportunity to build book at set fair-value and cheap-to-acquire zones for revisit of set all-time high, and into bullish extended phase if confidence on fiscal prudence is established beyond doubt. To this effect, Arun Jaitley should deliver FY15 Fiscal Deficit at 3.9-4.1% and revise FY16 BE at 3.6-3.9%. This will result in shift of Repo rate from 7.5 to 7.0% (and thereafter shift of operating policy rate from Repo to Reverse Repo rate) and to demand sovereign rating upgrade from global rating agencies. In the meanwhile, external cues will not turn destructive, at worst turn from supportive to neutral. It is visible that strong domestic tailwinds will have the power to defuse impact from minor external headwinds.
It is not the time to turn negative on India; take comfort from the collective wisdom, ability and desire of Narendra Modi, Arun Jaitley and Raghuram Rajan to turn around Indian economy into a sustainable growth engine to the benefit of Indian people and financial markets. It is the time for investors (and lenders) community to put money to work on risk-on assets for better reward. The perception on risk adjusted return on India assets has turned from negative to neutral and it is evolving to turn positive for sustainable period from FY16-FY19 and beyond!
Moses Harding
No comments:
Post a Comment