Research Edge Position: Short Indian Equities via IFN
Weekly Wholesale Price Inflation data issues by the Indian Ministry of Commerce today rose for the third consecutive week on a year-over-year basis. While still well below 1%, inflation has clearly signaled a bottom inside positive growth territory. For the politicians jockeying for position in the final stages of the National Election, the critical question is how much impact the wholesale decline in the past 8 months has had on the cost of living for the lower economic classes.
CPI data is released by the Labour Bureau on such a time lag that we do not have a clear view of how significantly prices have contracted in urban or rural areas, but fertilizer prices released today as a component of WPI registered at over 4% Y/Y providing some clues. As a critical component of the cost overhead for the massive portion of India's population laboring as subsistence farmers, we have been watching fertilizer prices carefully. Despite the increase in farm subsidies (including those on fertilizer) as part of the stimulus packages, the price of some basic agricultural products is still higher than many Congress Coalition incumbents from rural states would like. While there has been no indication of any major upsets yet, the opportunity for leftist hardliners to pander to the anger of the rural poor -the 700 million people that have seen the quality of their life improve little (or even erode) during the miraculous economic growth of the past decade, are real and could force a coalition realignment.
We have maintained a negative bias on the Indian economy since launching our firm early last year. Our short bias on Indian equities yielded spectacular results throughout last year, but we were bloodied a bit by a nasty little hit last month after we battled the India Bulls unsuccessfully. Now as the election draws to a close and the markets shake off the impossible promises of the campaign to focus on core issues, we expect the equity market to contract.
With global commodity reflation, slim prospects for increasing internal demand for high tech goods and services sufficient to offset US market share loss and the looming spectacle of the Satyam trials (which may well underscore basic concerns about accounting standards and regulatory controls) there are lots of near term drivers that could prove us right. As always we will take our cues from price action and change our positions as the data dictates but, for now, we are comfortable being contrarians and shorting the Indian market.