Eye on India मी अण्णा हजारे आहे (I am Anna Hazare) ::Macquarie Research,

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Eye on India
मी अण्णा हजारे आहे (I am Anna Hazare)
Event
 India has been fascinated by a common man, Anna Hazare, who has
singlehandedly brought the government to its knees over issues of corruption.
He has struck a common chord with the masses, who are finding in his cause
a way to release their growing frustration. Looking around the globe, a similar
thread is running with unrest in the Middle East, riots in London and no
protests in China! All of this points to a growing frustration within the middle
class.
 Barack Obama’s statement, “I think when you spread the wealth around,
it's good for everybody”, sums up the mood of governments globally. Most
governments are looking to increase the amount of money in the hands of the
masses. So, when I sit today to review my portfolio, it appears that the Indian
government, faced with upcoming elections, will continue with its populist
measures and hence consumption is the theme for the year.
 Portfolio changes – going Overweight Consumer Discretionary, Utilities
and retaining (reduced) Overweight in IT. Reducing Materials to Neutral and
Infra to Underweight. Maintaining Underweight on Banks. In our top 10 list,
we are replacing ICICI with HDFC Bank and swapping JSW Steel with Bharti.
What Caught our Eye
 Global cues, local blues: India was again the worst performing market this
week, underperforming the world index by 400bp and EMs by 240bp. IT was
again the worst performing sector (-4.4%). FIIs sold US$630m while domestic
MFs bought US$98m worth of (net) equities.
 Inflation erodes household savings; may peak soon: RBI data shows that
the household savings rate fell to 9.7% in FY11, the lowest in 13 years,
impacted by high inflation and slower growth in bank deposits, life insurance
funds and investment in equities (Link). Our economist, Tanvee Gupta Jain,
expects inflation to peak over the next two months and a 25bp rate hike on
Sep 16.
 Forex reserves to be put to good use - US$5bn energy fund: The
government may set up a sovereign fund to acquire natural assets like oil,
coal and gas abroad, which the RBI has agreed to fund from India’s
US$317bn forex reserves. (Link)
 Will black money ever come back? The government has ruled out any tax
amnesty for black money lying in Swiss banks, something that the UK and
Switzerland have recently agreed upon. India would prefer not only to bring
back the money but also to take criminal action against offenders. (Link)
Outlook
 Time for dead cat bounce? Markets have corrected quite sharply this week
and the possible announcement of QE3 will support the markets. Commodity
prices have not corrected as significantly and any rebound driven by seasonal
upticks or hopes for QE3 will make the RBI nervous and hence might increase
the chances of a further rate hike. We have turned more defensive and
recommend using the bounce, if any, to reduce risk.