The RBI may cut the repo rate twice this autumn as August CPI data has fallen below four per cent.
The India macro trade since the May 2014 BJP election landslide is now over.
Published: Mon 7 Sep 2015, 12:00 AM
Last updated: Mon 7 Sep 2015, 1:19 PM
India, the dream macro trade of 2014 on Modimania, was not immune to the global market angst after China's shock yuan devaluation. The Sensex has fallen to 25,200 and Nifty 7,650 as I write. I was stunned to see $1.9 billion flee Dalal Street in a single week in late August, though local funds were buyers. Foreign funds have seen their Indian equities portfolios gutted by the 45 per cent fall in the rupee against the US dollar in August 2011. RBI Governor Subbarao's monetary mismanagement compelled me to publish a strategy idea to short the Indian rupee at 45 in mid 2011. The Indian rupee tanker 50 per cent to 68 in August 2013.
Despite its sharp correction, India is still expensive at three times book value and 16.4 times forward earnings, double its historical 22 per cent ten-year premium to the Morgan Stanley Asia ex Japan index. There is no credible valuation case for India in a world where growth is being derated in favour of value. The earnings revision ratio in India has begun to accelerate to the downside, notably in telecoms, autos and infrastructure.
The India macro trade since the May 2014 BJP election landslide is now over. India is the biggest consensus overweight for emerging markets funds by at least 500 basis points. If another $100 billion flees this toxic asset class, the Sensex could well plummet to 18,000. While the fall in crude oil was a $50 billion windfall for the Indian economy in 2014-2015 and narrowed its trade deficit/inflation pressures, the oil plunge also coincided with an economic shock in Asia/China that will hit Indian earnings growth.
No sane investor should have been overweight emerging markets since the 2013 Fed "taper tantrum", though rationality is often an optical illusion east of Suez. As I expect the Chinese yuan to depreciate to at least 7.6 against the US dollar in 2016, the Indian rupee could well fall to 72 or lower, as the RBI cuts rates and offshore money flees Dalal Street as the Indian growth story derates in a world which could well see history's first Made in China recession. Barclays, CLSA and Nomura Securities have all slashed their Sensex targets. This is only the tip of iceberg. As Indian corporate profits disappoint and US economic data justifies a Federal Reserve rate hike, Bhaluji will maul Dalal Street. This is definitely not the time to book a leveraged passage to India.
I doubt if India's permabull cheerleaders will find their growth/policy narrative resonate among terrified fund managers in Wall Street and the City, let alone the Bahnhofstrasse or Singapore. Growth shock hits, blows to investor sentiment and retail redemptions take years, not weeks to resolve.
All is not doom and gloom for India in my 2H macro crystal ball. I expect the RBI to cut the repo rate twice this autumn as August CPI data has fallen below four per cent. Easy money in India makes me turn to HDFC Bank, ICICI Bank and Axis Bank, though I expect public sector banks will be crippled by a spike in non-performing loans to metal producers. While India's cyclical GDP uptick to seven per cent and the reform agenda of Modinomics is compelling, India is vulnerable to a hard landing in China and its shock waves across the planet. If the Middle Kingdom's economic growth rate was really seven per cent (The Politburo's target), Chinese August PMI would not be 49, a metric of contraction. Modinomics will also be difficult to implement in a nation with such, complex, diffuse and regional power constellations, as the BJP government has learnt with its blocked Land Acquisition and GST tax bills in the Lok Sabha.
There are dangerous pockets of overvaluation in Indian equities. Why does the midcap index trade at a premium in a world where liquidity and risk appetite is ebbing? What impact will a fall in the rupee to 72-74 have on the unhedged foreign debt of Indian oligarch conglomerates?
Apart from private banks, I like India pharma, given the 40 per cent generic and OTC drug market share commanded by Indian firms in the US. Note the stellar outperformance of Dr Reddys, Wockhardt and Glenmark Pharma in 2015. Indian IT firm Infosys is also a winner in a world where the rupee depreciates while US economic growth rises and operating margins are robust. Indian capital goods/engineering firms are grossly overvalued. The Indian property market is comically overvalued.
I track RBI interventions in the money markets, FII flows, Nifty put/call ratios and ETF/mutual fund redemptions. These all flashed a sell signal on Nifty since July. Better to be approximately right than precisely wrong in the Indian money bazaar.
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