India Monitor. 11 September MSCI India index (1m) India s Trinity Trilemma

Transcription

1 India Monitor India s Trinity Trilemma The sustained weakness and increased volatility of the INR have brought the fundamentals of India s economy into focus. Whilst many emerging market economies have been hit by expectations of tapering in the Fed s Quantitative Easing, India has been among the worst affected. Among its peers, the INR is the second-worst performing currency with a -12.6% 3m decline after the Indonesia Rupiah which has lost -14.5% 3m to date. The Reserve Bank India (RBI) referred to India s trinity trilemma in its last policy statement, highlighting slowing growth, a widening current account deficit and stubborn inflation as the main sources of India s vulnerability. 11 September 2013 To put this in context, in 2007 India s current account deficit stood at USD 8bn, but in 2013 it has increased to USD 300bn. Meanwhile, FX reserves in 2007 stood at USD300bn, but in 2013 these have fallen to USD 275bn. So the FX reserves now are just three times the size of the current account deficit, in comparison to 37.5 times in Similarly, the import cover currently stands at around 6 months, the lowest in 15 years, and significantly lower compared to its peers China (18 months) and Brazil (11 months). In terms of GDP, the current account deficit is at 4.8% of GDP, well above the RBI s comfort level of 2.5% of GDP. Inflation also remains stubbornly high above 5%. While supply side bottlenecks remain the main reason, a weak INR is aggravating the problem. India imports nearly 70% of its oil and a weak INR has increased the procurement cost of crude, resulting in pressure on the deficit and inflation. Growth became a casualty of the RBI s tight monetary policy, which was necessitated by high inflation and a widening current account deficit. A weak INR is also now weighing on growth as the RBI is being forced to pursue anti-inflation policies, to the detriment of short term growth. As a consequence India s GDP growth forecast for FY 2014 has been reduced to 4.0% - 4.5% from 5.5% at the start of the year. Economic data Weak, Weaker and Weakest A series of economic data releases over the past month has confirmed that the economy remains firmly in the grip of stagflation with the way out remaining uncertain, given sustained weakness in the INR. MSCI India index (1m) Aditya Pugalia Analyst adityap@emiratesnbd.com Jul 11-Jul 21-Jul 31-Jul 10-Aug 20-Aug 30-Aug Source: Bloomberg, Emirates NBD Research

2 India s manufacturing PMI for August came in at 48.5, falling below the expansionary threshold of 50.0 for the first time since March The weakness was broad based with new orders dropping 2.2 points and output declining 2.5 points. Surprisingly, new export orders also declined 2.6 points despite depreciation in the currency, which was expected to give a boost to exports. India s GDP growth for Q1 FY 2014 came in at 4.4% y/y, lower than consensus estimates of 4.7% y/y, with both investments and consumption slowing. Growth in the latter declined to 3.9% y/y from 6.2% y/y, while government spending increased 9.4% y/y compared to 4.0% y/y in the previous quarter. The GDP data reaffirms a significant loss of growth momentum. Whilst a good monsoon is likely to boost growth in H2 FY 2014, the weak currency and resultant tight liquidity is expected to remain a key drag on growth and put pressure on unhedged corporate balance sheets. Government spending, which was a key driver growth in Q1 FY 2014, is also expected to slow down amidst slowing tax revenues and fiscal slippage. According to recent data, the Government of India has already crossed 62% of its budgeted fiscal deficit in the first four months of this fiscal year. The wholesale price index inflation increased to 5.8% in July compared to 4.9% in June and higher than consensus expectations of 5.0%. Core inflation increased from 2.0% to 2.4%. Fuel price inflation was the biggest contributor, accounting for nearly 70 bps of the 100 bps m/m increase in inflation. This is significant because Indian crude basket has increased +22.7% in INR terms since start of July 2013, which has necessitated fuel prices hikes. Hence, we are likely to see continued pressure on inflation in the short term, further complicating the policy outlook of the RBI. Earnings Season Also weak Earnings from companies in Q1 FY 2014 disappointed even as expectations were already low. The aggregate adjusted Q1 FY 2014 earnings for the Sensex companies declined -1.0% y/y while revenue growth for the companies in the same period moderated to a three-year low of +1.0% y/y. Operating margins held steady on a y/y basis but decline c. 100bps on a q/q basis. Weak commodity prices helped margins on a y/y basis. While defensive sectors like Healthcare and IT performed better as growth recovery in developed economies and a weak currency helped companies, industrial and consumer discretionary sector stocks lagged behind as economic growth slowed and inflation remained elevated. A weak Q1 FY 2014 earnings season and slowing economic growth have prompted revisions in forecast with earnings for FY 2014 been revised downward by nearly 2% since the start of Q2 FY The breadth of the earnings revision was also negative with 19 companies in MSCI India seeing their EPS revised higher while EPS for 54 companies was revised lower. The trend is expected to continue as expectations for Q2 FY 2014 earnings also remains weak. New RBI Governor First day promise In his first day in office the new RBI Governor, Raghuram Rajan, dropped broad hints of gradually opening up India s banking sector. He also attempted to walk the tightrope between promoting price stability and boosting economic growth. Most strikingly he also appeared to indicate that the RBI will act more swiftly and aggressively to arrest the slide of the INR. Somewhat surprisingly Rajan announced a number of new measures to help boost the INR, in addition to the steps announced by the RBI previously. Among these measures, the RBI will offer a special window for swapping foreign currency nonresident deposits with a minimum tenor of three years and more at a fixed rate of Page 2

3 3.5% per year. The central bank also raised the overseas borrowing limit of 50% of unimpaired Tier 1 capital to 100% for the banks and the funding mobilized under this provision can be swapped with the RBI at a concessional rate of 100bps below the ongoing swap rate prevailing in the market. Both these measures should help boost liquidity in the banking system of both the USD and the INR and will be available to banks until the end of November The RBI also allowed exporters to re-book cancelled forward currency contracts up to 50% of the value and up to 25% for importers. In other moves, Rajan said that the RBI will introduce inflation indexed bonds and steadily liberalize the market and ease restrictions on investments and position taking. He also talked about reducing the requirements for banks to invest in government securities in a calibrated manner. Financial markets Still vulnerable Indian equity markets traded poorly over the last month as markets was rattled by increased volatility in the INR and as investors reconciled themselves to the onset of QE tapering by the US Federal Reserve. A potential widening of the military conflict in Syria added to the downward pressure in the market. Indian markets have moved firmly into negative territory for the year (MSCI India index -7.1% ytd) after Nifty lost - 4.4% over the past month. Furthermore Indian markets continue to underperform global equity markets with the MSCI India index losing -4.4% 1m compared to -2.2%1m decline in the MSCI Emerging Market index and -3.1% 1m drop in the MSCI World index. The weak points in the Indian growth story were well reflected in the sectoral performances. Industrial and Financial stocks were among the worst performing sectors losing -14.8% 1m and -11.7%1m respectively. Slowing economic growth has a direct impact on both these sectors and with the GDP growth slowing to a four-year low it is not surprising to see them underperform the broader market. The Technology sector (+8.4% 1m) continues to remain a standout performer as signs of economic recovery in developed markets coupled with a weak INR boost their business prospects. Indian markets are also seeing a sustained withdrawal of funds from foreign investors. Foreign Institutional investors (FIIs) sold USD 903mn of Indian equities and USD 1.4bn of Indian debt in the month of August. Domestic Institutional Investors (DIIs) were net buyers for a third consecutive month, buying USD 1.1bn in equities in August. Insurance companies and mutual funds bought equities worth USD 936mn and USD 163mn respectively. The INR had yet another weak month with the currency losing -9.6% 1m. While a possible tapering in the Fed s QE program, as well as India s huge current account and fiscal account deficits weighed on the INR, exacerbating these woes was the policy response of the Government of India and the RBI. Until the new RBI Governor took office, the policy response was too often seen as reactive and incoherent. While the INR may be supported in the short term by uncertainty over possible Fed tapering, and as military tensions in Syria play out, it is evident that the steps taken by the Government of India to address structural issues and revive economic growth will take a long time to succeed, especially in the context of a crucial election year. With broad USD strength also expected to continue over coming months, we are revising our 3-month and 6-month INR forecasts to and 65.0 respectively. Aditya Pugalia Page 3

4 Market watch and flows 6200 Nifty (1y) USD INR (ytd) Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul Dec 28-Feb 30-Apr 30-Jun 31-Aug 10y GoI yields (%, ytd) 10.0 FII flows (USD mn, ytd) Dec 28-Feb 30-Apr 30-Jun 31-Aug Dec 28-Feb 30-Apr 30-Jun 31-Aug Source: Bloomberg, Emirates NBD Research Page 4

5 BeST PB Ratio Performance and Valuations Nifty Sector Breakdown (1m return, %) Sensex continues to command premium Industrials Financials y = x R² = Sensex Telecom Con Goods Healthcare Utilities Tech MSCI BRIC Shanghai MSCI EM Bovespa Oil & Gas 7.8 B Material MICEX BeST PE Ratio Nifty performs in line with its emerging markets peers (ytd) 110 Nifty underperforms most developed markets (ytd) Mar 4-May 4-Jul 4-Sep NIFTY Index MXEF Index SHCOMP Index IBOV Index INDEXCF Index 80 4-Mar 4-May 4-Jul 4-Sep NIFTY Index MXGS Index SPX Index DAX Index NKY Index Source: Bloomberg, Emirates NBD Research Page 5

6 Economics GDP growth slows further (y/y, %) 12 IIP too declines (y/y, %) Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13-4 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Inflation sees an uptrend (y/y, %) RBI forced to pursue price stabilisation Jan-12 May-12 Sep-12 Jan-13 May Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Repo Rate (%) CRR (rhs) Source: Bloomberg, Emirates NBD Research Page 6

7 Disclaimer PLEASE READ THE FOLLOWING TERMS AND CONDITIONS OF ACCESS FOR THE PUBLICATION BEFORE THE USE THEREOF. By continuing to access and use the publication, you signify you accept these terms and conditions. Emirates NBD reserves the right to amend, remove, or add to the publication and Disclaimer at any time. Such modifications shall be effective immediately. Accordingly, please continue to review this Disclaimer whenever accessing, or using the publication. Your access of, and use of the publication, after modifications to the Disclaimer will constitute your acceptance of the terms and conditions of use of the publication, as modified. If, at any time, you do not wish to accept the content of this Disclaimer, you may not access, or use the publication. Any terms and conditions proposed by you which are in addition to or which conflict with this Disclaimer are expressly rejected by Emirates NBD and shall be of no force or effect. Information contained herein is believed by Emirates NBD to be accurate and true but Emirates NBD expresses no representation or warranty of such accuracy and accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained in the publication. The publication is provided for informational uses only and is not intended for trading purposes. Charts, graphs and related data/information provided herein are intended to serve for illustrative purposes. The data/information contained in the publication is not designed to initiate or conclude any transaction. In addition, the data/information contained in the publication is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to their determination. The publication may include data/information taken from stock exchanges and other sources from around the world and Emirates NBD does not guarantee the sequence, accuracy, completeness, or timeliness of information contained in the publication provided thereto by or obtained from unaffiliated third parties. Moreover, the provision of certain data/information in the publication may be subject to the terms and conditions of other agreements to which Emirates NBD is a party. None of the content in the publication constitutes a solicitation, offer or recommendation by Emirates NBD to buy or sell any security, or represents the provision by Emirates NBD of investment advice or services regarding the profitability or suitability of any security or investment. Moreover, the content of the publication should not be considered legal, tax, accounting advice. The publication is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. Accordingly, anything to the contrary herein set forth notwithstanding, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from the publication including, but not limited to, quotes and financial data; (b) loss or damage arising from the use of the publication, including, but not limited to any investment decision occasioned thereby. (c) UNDER NO CIRCUMSTANCES, INCLUDING BUT NOT LIMITED TO NEGLIGENCE, SHALL EMIRATES NBD, ITS SUPPLIERS, AGENTS, DIRECTORS, OFFICERS, EMPLOYEES, REPRESENTATIVES, SUCCESSORS, ASSIGNS, AFFILIATES OR SUBSIDIARIES BE LIABLE TO YOU FOR DIRECT, INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE, OR EXEMPLARY DAMAGES EVEN IF EMIRATES NBD HAS BEEN ADVISED SPECIFICALLY OF THE POSSIBILITY OF SUCH DAMAGES, ARISING FROM THE USE OF THE PUBLICATION, INCLUDING BUT NOT LIMITED TO, LOSS OF REVENUE, OPPORTUNITY, OR ANTICIPATED PROFITS OR LOST BUSINESS. The information contained in the publication does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Anyone proposing to rely on or use the information contained in the publication should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts regarding information contained in the publication. Further, references to any financial instrument or investment product is not intended to imply that an actual trading market exists for such instrument or product. In publishing this document Emirates NBD is not acting in the capacity of a fiduciary or financial advisor. Emirates NBD and its group entities (together and separately, "Emirates NBD") does and may at any time solicit or provide commercial banking, investment banking, credit, advisory or other services to the companies covered in its reports. As a result, recipients of this report should be aware that any or all of the foregoing services may at times give rise to a conflict of interest that could affect the objectivity of this report. The securities covered by this report may not be suitable for all types of investors. The report does not take into account the investment objectives, financial situations and specific needs of recipients. Data included in the publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records. In receiving the publication, you acknowledge and agree that there are risks associated with investment activities. Moreover, you acknowledge in receiving the publication that the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described in the publication and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with you. You acknowledge and agree that past investment performance is not indicative of the future performance results of any investment and that the information contained herein is not to be used as an indication for the future performance of any investment activity. You acknowledge that the publication has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and such others. All present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall, as between you and Emirates NBD, at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties. Except as specifically permitted in writing, you acknowledge and agree that you may not copy or make any use of the content of the publication or any portion thereof. Except as specifically permitted in writing, you shall not use the intellectual property rights connected with the publication, or the names of any individual participant in, or contributor to, the content of the publication, or any variations or derivatives thereof, for any purpose. YOU AGREE TO USE THE PUBLICATION SOLELY FOR YOUR OWN NONCOMMERCIAL USE AND BENEFIT, AND NOT FOR RESALE OR OTHER TRANSFER OR DISPOSITION TO, OR USE BY OR FOR THE BENEFIT OF, ANY OTHER PERSON OR ENTITY. YOU AGREE NOT TO USE, TRANSFER, DISTRIBUTE, OR DISPOSE OF ANY DATA/INFORMATION CONTAINED IN THE PUBLICATION IN ANY MANNER THAT COULD COMPETE WITH THE BUSINESS INTERESTS OF EMIRATES NBD. YOU MAY NOT COPY, REPRODUCE, PUBLISH, DISPLAY, MODIFY, OR CREATE DERIVATIVE WORKS FROM ANY DATA/INFORMATION CONTAINED IN THE PUBLICATION. YOU MAY NOT OFFER ANY PART OF THE PUBLICATION FOR SALE OR DISTRIBUTE IT OVER ANY MEDIUM WITHOUT THE PRIOR WRITTEN CONSENT OF EMIRATES NBD. THE DATA/INFORMATION CONTAINED IN THE PUBLICATION MAY NOT BE USED TO CONSTRUCT A DATABASE OF ANY KIND. YOU MAY NOT USE THE DATA/INFORMATION IN THE PUBLICATION IN ANY WAY TO IMPROVE THE QUALITY OF ANY DATA SOLD OR CONTRIBUTED TO BY YOU TO ANY THIRD PARTY. FURTHERMORE, YOU MAY NOT USE ANY OF THE TRADEMARKS, TRADE NAMES, SERVICE MARKS, COPYRIGHTS, OR LOGOS OF EMIRATES NBD OR ITS SUBSIDIARIES IN ANY MANNER WHICH CREATES THE IMPRESSION THAT SUCH ITEMS BELONG TO OR ARE ASSOCIATED WITH YOU OR, EXCEPT AS OTHERWISE PROVIDED WITH EMIRATES NBD S PRIOR WRITTEN CONSENT, AND YOU ACKNOWLEDGE THAT YOU HAVE NO OWNERSHIP RIGHTS IN AND TO ANY OF SUCH ITEMS. MOREOVER YOU AGREE THAT YOUR USE OF THE PUBLICATION IS AT YOUR SOLE RISK AND ACKNOWLEDGE THAT THE PUBLICATION AND ANYTHING CONTAINED HEREIN, IS PROVIDED "AS IS" AND "AS AVAILABLE," AND THAT EMIRATES NBD MAKES NO WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, AS TO THE PUBLICATION, INCLUDING, BUT NOT LIMITED TO, MERCHANTABILITY, NON-INFRINGEMENT, TITLE, OR FITNESS FOR A PARTICULAR PURPOSE OR USE. You agree, at your own expense, to indemnify, defend and hold harmless Emirates NBD, its Suppliers, agents, directors, officers, employees, representatives, successors, and assigns from and against any and all claims, damages, liabilities, costs, and expenses, including reasonable attorneys and experts fees, arising out of or in connection with the publication, including, but not limited to: (i) your use of the data contained in the publication or someone using such data on your behalf; (ii) any deletions, additions, insertions or alterations to, or any unauthorized use of, the data contained in the publication or (iii) any misrepresentation or breach of an acknowledgement or agreement made as a result of your receiving the publication. Page 7

8 Emirates NBD Research & Treasury Contact List Emirates NBD Head Office 12th Floor Baniyas Road, Deira P.O Box 777 Dubai Aazar Ali Khwaja Group Treasurer & EVP Global Markets & Treasury aazark@emiratesnbd.com Tim Fox Head of Research & Chief Economist timothyf@emiratesnbd.com Research Khatija Haque Senior Economist khatijah@emiratesndb.com Irfan Ellam Head of MENA Equity Research Mohammedie@emiratesnbd.com Aditya Pugalia Analyst adityap@emiratesnbd.com Jean-Paul Pigat MENA Economist jeanp@emiratesnbd.com Sales & Structuring Head of Sales & Structuring Sayed Sajjid Sadiq sayeds@emiratesnbd.com London Sales Lee Sims +44 (0) simsl@emiratesnbd.com Saudi Arabia Sales Numair Attiyah numaira@emiratesnbd.com Egypt Shahinaz Foda shahinaz.foda@bnpparibas.com Singapore Sales Supriyakumar Sakhalkar supriyakumars@emiratesnbd.com Group Corporate Communications Ibrahim Sowaidan ibrahims@emiratesnbd.com Claire Andrea clairea@emiratesnbd.com Page 8