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BOOKING RESEARCH ALPHA IN INDIA

Takeaway: We are content to “book” the gain in India here, as we now see risk/reward favoring short-sellers in the near term (~1-3M).

The cyclical component of our thesis (i.e. improving GIP fundamentals + tightening fiscal and current account balances + speculation around political reform into the 2014 general elections = buy India) has as played out in spades in both the data and the early exit polling results.

 

BOOKING RESEARCH ALPHA IN INDIA - INDIA

 

BOOKING RESEARCH ALPHA IN INDIA - BUDGET BALANCE


BOOKING RESEARCH ALPHA IN INDIA - CURRENT ACCOUNT BALANCE

 

BOOKING RESEARCH ALPHA IN INDIA - 1

 

BOOKING RESEARCH ALPHA IN INDIA - 2

 

Indian capital and currency markets have performed quite remarkably since we outlined our bullish thesis back on OCT 29th of last year. Specifically, the EPI etf has appreciated +21.6% since then, which compares to a sample mean of -1.4% across the 24 country-level EM etfs we track and good for the second-best performance over this duration. Moreover, the INR has appreciated +3.2% vs. the USD since then, which compares to a sample mean of -2.4% across the 21 currencies we track across Asia and Latin America and good for the third-best performance over this duration. Going back to the EPI etf, this fund has ripped +19.2% in the last ~3M alone (note: we reiterated our bullish bias in a detailed note on JAN 22) – implying some degree of investors crowding into this trade.

 

BOOKING RESEARCH ALPHA IN INDIA - EM Divergence Monitor

 

BOOKING RESEARCH ALPHA IN INDIA - FX

 

Given the recent performance, the risk that election results disappoint and lack of near-term positive catalysts, we think astute investors will look to book gains in Indian capital markets over the next ~1-3M. A diminished macroeconomic tailwind is cause for concern in the summer months as our GIP model has Indian real GDP growth slowing in the third quarter.

 

Key question: How much better is Indian economic growth going to get in the near term if consumer price inflation accelerates in 2Q?

 

BOOKING RESEARCH ALPHA IN INDIA - COMPOSITE PMI

 

BOOKING RESEARCH ALPHA IN INDIA - CPI

 

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Additionally, there’s a fair degree of open-the-envelope risk on Friday’s final vote tally, given India’s shaky history with exit polling. Specifically, the SENSEX dropped -11% in a single day in 2004 when the BJP coalition’s share was found to have been overstated by 70 seats in exit polls and the index rallied +17% in a single day in 2009 when the BJP coalition’s share was found to have been overstated by 30 seats in exit polls. Thinking longer-term, that’s an [potential] correction we’d want to buy – assuming Modi and the BJP capture enough of a ruling mandate to implement noteworthy economic reforms.

 

We continue to think what Dr. Rajan is doing on the monetary policy front is equally as critical – if not more critical – to structural improvement in India’s GIP fundamentals. While recent political rhetoric suggests that both his job and the RBI’s long-term policy guidance are safe, we can’t rule out investors speculating on an attack on the central bank’s sovereignty given that Dr. Rajan was appointed by the [likely] incumbent Congress Party and that his hawkish bias conflicts with Modi’s emphasis on promoting growth (albeit via proper economic management). That would be bad for the rupee and, historically, what’s bad for the rupee is bad for India (i.e. Quad #3 on our GIP model) because of the country’s dependence on foreign capital.

 

Feel free to ping us with any follow-up questions. Have a wonderful evening,

 

DD

 

Darius Dale

Associate: Macro Team


Poll of the Day Recap: 81% Say Yes, Central Planners Are Destroying America

Takeaway: 81% said YES; 19% NO.

Bestselling, “Death of Money” author Jim Rickards discussed with Keith McCullough on HedgeyeTV last week how central bankers are destroying America.

 

We wanted to know if you agreed with Rickards, so we asked in today’s poll: Are central planners destroying America?

 

Poll of the Day Recap: 81% Say Yes, Central Planners Are Destroying America - Capitol in Ruins

 

At the time of this post, a clear 81% majority said YES; 19% NO.

 

These YES voters firmly (and even passionately) explained their choice:

 

  • “Fiscal policy hasn’t been and still isn’t able to induce sufficient real growth, so central bankers are committed to inducing sufficient inflation to attain and maintain a sustainable trend of deficit spending. Current monetary policy of currency devaluation robs the majority of their wealth given their insufficient allocation for greater inflation and understanding of sudden (market sentiment change)/(loss of confidence in the dollar).”

 

  • “Yes for several reasons, but mainly they have failed at creating the inflation they wanted and instead are getting the inflation you don't want (low wages, higher food prices). The low USD valuation is having long-term effects not just on purchasing power, but on economy/employment because of weak consumer purchasing power. Overall, I agree with Rickards that this is going to cost us our position as world currency leader. And, when that shoe falls, I hope not to be in the country or at least in Oakland, CA.”

 

  • “A country's currency is the best way to measure its economic strength. But our Fed is deliberately shooting our country on the foot. WTF!!! “

 

Of those who explained why they voted NO, one person said to “Buck up and play the game,” while another said, “Don't be consensus.”

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LO and RAI Off To The Races, Again Takeout Rumors

The tobacco rumor mill stirred up late yesterday with the London Times reporting that BAT could buy its remaining share of RAI (58%) and/or that RAI is looking to buy LO.  The Times mentioned that BAT sought out Deutsche Bank as an advisor for a possible deal; we’ll note here that these are not “new” rumors as BAT has been exploring potential deals since last year, and since mid-March of this year the rumor mill on a RAI-LO deal swirled heavily. 

 

Two weeks ago this same rumor “excitement” contributed to a +8.5% w/w move in LO’s stock price, however last week was apparently “rumor off” week and the stock was basically flat.

 

We maintain that this rumor flow continues to be a great tailwind for our Best Idea Long Call Lorillard that we presented on March 4 of this year, with a longer term price target of $80/share.

 

We maintain that a hypothetical deal (especially an imminent one) between RAI and LO is challenged:

  • Our main flag is that a combined RAI + LO would own ~ 67% of U.S. menthol market, which we believe should trigger anti-trust flags.
  • Big tobacco is already a highly concentrated industry in the U.S. across the big three – MO has a leading ~51% of market share; a combined RAI + LO would equate to ~ 42% share.   

RAI could look to divest such menthol brands as Kool, Winston and Salem (~5% total market share), which could serve to change the consideration of the FTC/DOJ.

 

We’re not surprised to hear rumors that LO is a take-out target. Underlining our Best Idea Long Call on Lorillard in early March was the strength of its portfolio:

  • Leading share and profitability of its core menthol business,
  • Our belief in the limited menthol regulatory risk over the longer term (substantiated by a Washington, D.C. tobacco expert), and
  • Upside growth in its blu e-cigarette business that commands leading share in the U.S.

As part of the Best Idea’s thesis we did not consider a RAI + LO deal. We also think the recent announcement that Susan Cameron will replace Daan Delen on May 1 could also be fueling some speculation that she wants to come out of the box “strong” – which is drumming up rumors about this deal. 

 

Below we’ve outlined our TREND duration over the intermediate term (3 month); appreciation to our $80/share target would be +35% higher than today’s price.

 

LO and RAI Off To The Races, Again Takeout Rumors - lo lo new

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


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MACAU: SOLID 2ND WEEK CONSIDERING END OF GOLDEN WEEK

No change to our full month forecast of +20% YoY growth following the release of this past week’s table revenues.  Daily table revenues (DTR) averaged HK$1,001 million this past week, up 25% YoY.  As expected, DTR softened sequentially following the end of the Golden Week holiday but was up nicely YoY.  Month to date DTR are tracking up 16%.  Fears of a significant VIP slowdown continue to be proven unfounded. 

 

In terms of market share, LVS and MPEL are tracking below recent trend, consistent with April’s results.  We believe MPEL continues to be impacted by some junket liquidity issues more than the other casino operators.  WYNN and MGM are tracking above (go peninsula!).  WYNN remains our favorite operator given the potential for market share gains, particularly in VIP.  

 

MACAU: SOLID 2ND WEEK CONSIDERING END OF GOLDEN WEEK - macau1

 

MACAU: SOLID 2ND WEEK CONSIDERING END OF GOLDEN WEEK - macau2


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