India Strategy
Tire Puncture, Not Engine
Breakdown
Key equity drivers turn shaky: Four crucial drivers to
our bullish view have been: a) the prospects of a
steepening yield curve – the bond market’s way of telling
us that growth is returning, b) rising real rates because
of falling inflation, c) improving domestic liquidity, and d)
a steady recovery in earnings. RBI action has hurt things
at the margin. The yield curve flattened – no surprise
since rising rates will put pressure on growth. Real rates
rose further but for the wrong reason – higher nominal
rates – not something equities cherish. Liquidity has
tightened and it appears that the RBI does not intend to
supply INR anytime soon. Earnings will likely get better
but the pace of improvement is a debate now.
This is not an end of the world story but it does put
brakes on the nascent bull market for now. We expect
the Nifty to trade in the 5600-6300 range for the rest of
2013 largely because the Bank index ex-HDFC Bank will
likely struggle to make headway. Valuations and
sentiment protect the downside but draining global and
local liquidity and fresh growth uncertainty will likely cap
the upside. Turning less bullish for the near term does
not mean we are bearish or less bullish on the medium
term. It means that investors should not expect the index
to break new levels in 2013 – this is now more likely a
2014 event when the dust settles on the INR (as fiscal
and monetary tightening feeds into the CAD). The
implications are: a) the market may not abandon quality
for cyclicals or value, b) banks underperform, and c)
dispersion of returns continues to rise. We persist with
GARP and, now, avoid deep cyclicals.
Indeed, a rising dollar will constantly challenge the rupee
but its relative position could improve in the next six
months. In the near term, India’s CPI and US labor data
(good data is bad news for the INR) will determine RBI
actions. Investors need not despair because ex-banks,
we think the market should deliver better-than-fair
returns for the balance of 2013. The consumer is healing
with falling inflation (good rains helping). Bottom-up
stock picking should still produce the goods.
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Tire Puncture, Not Engine
Breakdown
Key equity drivers turn shaky: Four crucial drivers to
our bullish view have been: a) the prospects of a
steepening yield curve – the bond market’s way of telling
us that growth is returning, b) rising real rates because
of falling inflation, c) improving domestic liquidity, and d)
a steady recovery in earnings. RBI action has hurt things
at the margin. The yield curve flattened – no surprise
since rising rates will put pressure on growth. Real rates
rose further but for the wrong reason – higher nominal
rates – not something equities cherish. Liquidity has
tightened and it appears that the RBI does not intend to
supply INR anytime soon. Earnings will likely get better
but the pace of improvement is a debate now.
This is not an end of the world story but it does put
brakes on the nascent bull market for now. We expect
the Nifty to trade in the 5600-6300 range for the rest of
2013 largely because the Bank index ex-HDFC Bank will
likely struggle to make headway. Valuations and
sentiment protect the downside but draining global and
local liquidity and fresh growth uncertainty will likely cap
the upside. Turning less bullish for the near term does
not mean we are bearish or less bullish on the medium
term. It means that investors should not expect the index
to break new levels in 2013 – this is now more likely a
2014 event when the dust settles on the INR (as fiscal
and monetary tightening feeds into the CAD). The
implications are: a) the market may not abandon quality
for cyclicals or value, b) banks underperform, and c)
dispersion of returns continues to rise. We persist with
GARP and, now, avoid deep cyclicals.
Indeed, a rising dollar will constantly challenge the rupee
but its relative position could improve in the next six
months. In the near term, India’s CPI and US labor data
(good data is bad news for the INR) will determine RBI
actions. Investors need not despair because ex-banks,
we think the market should deliver better-than-fair
returns for the balance of 2013. The consumer is healing
with falling inflation (good rains helping). Bottom-up
stock picking should still produce the goods.
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