BUY MORE INDIA ON WEAKNESS?

Takeaway: India is poised to remain a relative winner amid the sinking ship that our #EmergingOutflows theme continues to call out.

This note was originally published May 31, 2013 at 14:22 in Macro

SUMMARY BULLETS:

 

  • As we have mentioned repeatedly, a tapering of QE or mere expectations that QE will be ended sooner (i.e. “6-handle” in 2014) rather than later (i.e. “6-handle” in 2017) and the accompanying USD strength and US Treasury weakness (i.e. higher rates) are the biggest risks to emerging market asset prices over the long term.
  • For current account deficit economies like India, the threat of capital outflows – or just sustainably slower capital inflows – puts their respective structural growth outlooks at risk. To India’s credit, imports of the now-crashing gold account for ~80% of the total current account deficit; India also imports ~80% of their crude oil consumption, so #StrongDollar actually mitigates their primary economic risk (per RBI Governor Duvvuri Subbarao on MAY 4) via commodity deflation. Moreover, Finance Minster Chidambaram’s fiscal consolidation plan – while pathetic underneath the hood – is a signal that they are cognizant of these risks and are at least attempting to address them.
  • Within the EM space – which we clearly do not like across the various asset classes – we continue to prefer overweighting consumption-heavy countries, like India, on the long side with respect to the intermediate-term TREND duration. Another factor in support of maintaining a TREND-duration bullish bias on Indian equities is its robust intermediate-term GIP outlook.
  • All told, India is poised to remain a relative winner amid the sinking ship that our #EmergingOutflows theme continues to call out. To that tune, the latest data shows a $2.9B WoW outflow from EM equities, which was the largest since DEC ’11; moreover, the $200M outflow from EM debt was the first in 51 weeks. Remember, valuation is not a catalyst when the Queen Mary turns – or better yet, capsizes. It’s important that investors fully comprehend the “Queen Mary” for what it really is/was – an institutionalized search for yield.

 

 

Overnight, India put up a directionally positive, but absolutely weak 1Q13 real GDP number of +4.8% YoY (from +4.7% prior). That, coupled with concerns surrounding recent INR weakness (-5.2% MoM vs. the USD), drove the SENSEX to its biggest 1-day loss in 14 months (-2.3%).

 

BUY MORE INDIA ON WEAKNESS? - 1

 

BUY MORE INDIA ON WEAKNESS? - 2

 

International investors have been net sellers of rupee-denominated bonds each day since holdings touched a record $38.5 billion back on MAY 21. As we have mentioned repeatedly, a tapering of QE or mere expectations that QE will be ended sooner (i.e. “6-handle” in 2014) rather than later (i.e. “6-handle” in 2017) and the accompanying USD strength and US Treasury weakness (i.e. higher rates) are the biggest risks to emerging market asset prices over the long term.

 

BUY MORE INDIA ON WEAKNESS? - 3

 

BUY MORE INDIA ON WEAKNESS? - 4

 

For current account deficit economies like India, the threat of capital outflows – or just sustainably slower capital inflows – puts their respective structural growth outlooks at risk. To India’s credit, imports of the now-crashing gold account for ~80% of the total current account deficit; India also imports ~80% of their crude oil consumption, so #StrongDollar actually mitigates their primary economic risk (per RBI Governor Duvvuri Subbarao on MAY 4) via commodity deflation. Moreover, Finance Minster Chidambaram’s fiscal consolidation plan – while pathetic underneath the hood – is a signal that they are cognizant of these risks and are at least attempting to address them.

 

BUY MORE INDIA ON WEAKNESS? - 5

 

Within the EM space – which we clearly do not like across the various asset classes – we continue to prefer overweighting consumption-heavy countries, like India, on the long side with respect to the intermediate-term TREND duration. Another factor in support of maintaining a TREND-duration bullish bias on Indian equities is its robust intermediate-term GIP outlook.

 

BUY MORE INDIA ON WEAKNESS? - INDIA

 

Obviously both incremental rupee weakness and continued political gridlock ahead of the MAY ’14 general elections are key idiosyncratic risks to the downside. That being said, however, political gridlock has largely become the base case scenario during the Singh administration.

 

As such, any positive momentum on bills to reduce restrictions on foreign investment in the country’s pension and insurance industries, overhaul the 1894 colonial-era Land Acquisition Act and help implement a uniform goods and services tax to encourage commerce would be a dramatic upside surprise for investors ahead of next year’s elections.

 

All told, India is poised to remain a relative winner amid the sinking ship that our #EmergingOutflows theme continues to call out. To that tune, the latest data shows a $2.9B WoW outflow from EM equities, which was the largest since DEC ’11; moreover, the $200M outflow from EM debt was the first in 51 weeks.

 

Remember, valuation is not a catalyst when the Queen Mary turns – or better yet, capsizes. It’s important that investors fully comprehend the “Queen Mary” for what it really is/was – an institutionalized search for yield.

 

Stay tuned.

 

Darius Dale

Senior Analyst


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