DO INDIAN EQUITIES HAVE ROOM TO RUN?

CONCLUSION: Indian equities may be on the verge of a sustainable quantitative breakout driven largely by improving POLICY fundamentals (namely the passage of key economic reforms). Conversely, a failure at the SENSEX’s TREND line of resistance would likely be a leading indicator for Indian policymakers running into the proverbial wall – again. As such, we’ll be keeping a close eye on the Indian political landscape over the intermediate term.


In India’s upcoming month-long parliamentary session, several key economic reforms are on the table, including: 

  • Increased government investment in transportation and energy infrastructure;
  • A mandate to require Indian corporations to spend at least 2% of their profits on social projects;
  • A simplification of India’s convoluted and oft-circumvented tax code, which, according to official estimates, would reduce the corporate tax burden by -7.4% in aggregate;
  • A plan to re-open India’s multi-brand retail, aviation and supermarkets industries to majority foreign direct investment stakes; and
  • A proposal to accelerate foreign investment into Indian pension and insurance funds. 

For the Indian parliament, which has been hampered by partisan gridlock made worse by the late-FEB rout of the ruling Congress Party in regional elections, the aforementioned agenda is indeed a tall order – particularly for a parliament that spends more time squabbling than debating public policy. According to the New Delhi-based PRS Legislative Research, the Indian parliament spent just 14% of the previous session debating new laws and the 2011 total of just 22 new laws ratified is the second-lowest total on record (data since 1952).

To the previous point regarding parliamentary gridlock, members of the Bharatiya Janata Party – the Congress Party’s main opposition group  - physically walked out of the room each time former Home Minister and newly-appointed Finance Minister Palaniappan Chidambaram addressed the house due to their belief that his failure to insist on a transparent auctioning process enabled the illegal dealings of $2.7B in telecommunication airwaves licenses – transactions that ultimately cost the government $4.8B in potential revenues per the Central Bureau of Investigation and has former Telecommunications Minster Andimuthu Raja facing criminal trial.

For reference, India ranks 95th out of 182 countries in Transparency International’s 2011 Corruption Perceptions Index – a ranking this is likely to fall further in 2012 given the notable rejection of Prime Minister Singh’s anti-corruption Lokpal bill in DEC. Party member Yashwant Sinha, stated recently that the BJP is currently meeting to decide whether or not to continue with the protests, which have been in effect since NOV. To the extent they chose to continue protests or at least maintain their “non-negotiable” stance on Chidambaram, we could see parliamentary gridlock in India escalate even from current heavily-constipated levels.

That would be very unfortunate for an Indian economy in dire need of a dramatic acceleration in political resolve with respect to reigning in the nation’s bloated fiscal deficit and promoting an meaningful step-up in foreign investment that would supplement the country’s bloated current account deficit and ultimately allow the nation’s economic growth to recapture pre-crisis trend growth rates of +9%-plus. For more on these topics, please refer to the following two notes: “INDIA STRIKES OUT AGAIN” and “IS INDIA OUT OF BULLETS?”. Boosting the exchange rate, which is trading just 3.4% above all-time lows (JUN ’12), would also be an added benefit of the latter initiative and a stronger currency would be positive for India’s intermediate-term inflation dynamics. Per the RBI’s latest statement, which was accompanied by a disappointing  failure to lower benchmark interest rates, inflation remains above the central bank’s “comfort zone”.

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Another area where India is in dire need of stronger leadership is in the energy infrastructure sector. Last week, the country’s worst power grid failure in a decade cut electricity supplies to nearly half of the country’s 1.2B population. Rolling blackouts are a way of life in India, which ranks 56th out of 142 countries in the World Economic Forum’s 2011-12 Global Competitiveness Index (112th in Quality of Electricity Supply) and major public failures such as these come as no surprise to our Hedgeyes, as India has missed every annual target to increase electricity production capacity since 1951! Prime Minister Singh is currently planning to secure $400B of investment in the power industry over the next 5yrs to fund a targeted increase of 76,000 megawatts in generation capacity. Needless to say, there are a lot of Indians sitting in the dark hoping he can arrest the long-term trend in this regard.

As things stand today, we maintain our neutral-to-bullish bias on Indian equities, having officially gotten out of the way on the bearish side in our JUN 4 note titled, “BACKING OFF INDIA – AT LEAST FOR NOW”. For reference, India’s benchmark SENSEX Index is up +8.9% since JUN 4 and closed within 30bps of a TREND-line eclipse on our quantitative risk management factoring. To the extent the TREND line is sustainably eclipsed (3wks worth of closing prices), we would view Indian equities as a potential long idea with respect to the aforementioned duration, especially if a [potential] confirmed quantitative breakout is supported by the passage of one or more of the aforementioned policy initiatives. That would likely spark a trend of positive revisions in investor sentiment towards the Indian economy, which has certainly lost a fair amount of its “BRIC” storytelling luster in recent quarters. It’s important to note that expectations of partisan gridlock have largely become the consensus view on Indian fiscal and regulatory policy; that creates meaningful headroom for an upside surprise here.

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All told, Indian equities may be on the verge of a sustainable quantitative breakout driven largely by improving POLICY fundamentals (namely the passage of key economic reforms). Conversely, a failure at the SENSEX’s TREND line of resistance would likely be a leading indicator for Indian policymakers running into the proverbial wall – again. As such, we’ll be keeping a close eye on the Indian political landscape over the intermediate term.

Darius Dale

Senior Analyst