India's equity market rebounded last night to make up over half of Tuesday's Sensex decline as the market continues to digest a slew of secondary offering announcements. In addition to corporate announcements, moves by the Oil Ministry to reduce retail fuel subsidies is seen by some as a government move to help refiner margins in advance of government divestitures in the energy sector.
For BSE listed firms, the massive run up in recent months provides an irresistible liquidity opportunity -particularly as spreads for corporate borrowing have remained stubbornly high despite loosening RBI policies. How big an impact dilution can have on the equity market is a matter of debate, but with total BSE market capitalization roughly equal to the combined capitalization of Exxon and PetroChina and with major hurdles still facing foreign direct investment into the equity markets any share sale overhang will likely elicit a sharp response in the near term.
Trade data released by the ministry of commerce overnight continues to paint grim picture for external demand. Exports declined for the eight consecutive month on a year-over-year basis registering at -29.2%, a sequential improvement over last month's record decline (see chart below). Declining imports drove the trade deficit to expand for the month to $5.2 Billion.
A lot of readers continue to ask us about our perceived negative bias to Indian equities , in spite of (or perhaps inspired by) the 50% YTD Sensex run. If we were outright negative, we'd be short the IFN - we're not. For the most part we agree with the bulls on the positive implications of the election results, but duration is critical in any discussion of our view on India. Strategically (that is, on a longer duration) we have a negative bias towards the Indian economy on a relative basis, and yesterday's export data cuts right to the heart of one of the key factors in our thesis.
Many strategists believe that India's relatively modest dependence on exports, at just 15% of GDP, is helping to contribute to a "virtuous cycle" of internally driven development. We are not convinced. By largely "skipping" the industrial phase of development and moving directly towards a service and technology based economic base, we think that there is a major risk is that the 55% of the population that are rural farmers living in dire poverty will be unable to close the wage and education gap to become developed world level consumers. Educational and economic programs designed to eradicate poverty implemented by the government have thus far been profoundly unsuccessful in closing this gap.
Ultimately, if the majority of the Indian population are unable to develop into domestic consumers for the growth industries that are the cornerstone of the rapid economic growth in recent years, we are confident that the economy there will grow at a slower rate than developing nations that have faster developing consumer bases.
One of the easy traps that we see our fellow investors falling into with respect to India is the "law of big numbers" -the notion that India has such a huge population that there has to be tremendous growth in the long run. We partially reject this notion and believe that the current course of Indian development -while increasing the size of the middle class in both size and relative affluence, will not elevate the vast majority to the same consumption growth level that we anticipate that Brazilian and Chinese populations will.
In short we see India's much vaunted lack of export dependency as a critical long term weakness rather than strength -and that puts us at odds with many other observers.
Having said all that, in the near term we actually agree with many of the most vocal bulls on India with respect to opportunities for individual companies and brands, and furthermore see the Singh administration's victory as a catalyst for new efficiency in development process overall. We simply diverge from the hyper-bulls over the size of the macro hurdles which the Indian economy faces, and believe that there are many developing markets which present a more attractive long term growth opportunity.
Far from being contrarians, we are committed developing market investors, who just happen to see many economies that present more attractive long term opportunities than India.
For big banks and brokerages, the watershed moment of the Congress Party's victory opened the door for a wave of secondary offerings, government divestitures and IPOs that will no doubt generate a huge amount of fees. Perhaps if Research Edge had a syndicate desk I would be as bullish as my competitors.