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Today the Indian Government released its much awaited 2015 Budget. It is a smart & tactically sound budget directed towards the middle class and the poor. Perhaps it was driven so due to the recent wipeout for the ruling party in the Delhi municipal elections a couple of weeks ago. More on the Delhi election in a subsequent article but suffice it to say that PM Modi has been on the offensive since that loss.
Any one who understands India becomes bullish on India’s Micro – the smarts of the Indian people, their entrepreneurship and the structurally sound nature of the Indian economy. The trouble has been India’s Macro picture that is mainly governed by fiscal, political and strategic policy. And that can only be described as brain-dead or dumb-as-a-doorknob at least for the first 66 odd years of India’s Independence. Because that India was British obedient and never mentally independent. PM Modi, in our opinion, is the first core Indian & mentally independent leader of free India. His election has changed India’s macro story from negative to positive. Now India’s micro & macro are positively aligned and integrated. That is why there has been a party going on in the Indian stock market to paraphrase the title of a report from Columbia Management.
We strive very hard to be true to what we see and analyze. Emotions count very little in our analysis and we tend to fade emotional excesses as a general tactic. We turned negative on India and EM in July 2011 and advised exiting India. There was a small bubble in Emerging Markets at that time and India was particularly effervescent. One year later, the Indian story was in tatters and everybody had turned torridly negative on India. We thought they were wrong and wrote a detailed article in Knowledge@Wharton arguing why India will be the first EM market to fly again. Fortunately, our analysis proved correct.
Another year later, India suffered a currency crash in which the Indian Rupee fell to previously unimagined level of Rs. 68. On August 31, 2013, we pointed out that both the Indian Rupee and the Indian stock market had bottomed mid-morning (US time) on Wednesday August 28 and reversed to the upside. We described an institutional purchase of 1.125 million shares of India ETF, EPI, at $13.10 that was reported by Jon Najarian of Option Monster on CNBC. That reversal was driven, to use technical jargon, by a DeMark trend exhaustion signal. What a buying opportunity that was? That EPI has risen from $13.10 to $24.19 as of Friday, a gain of 84.66% in 18 months. If that isn’t a party, we don’t know what is.
Today, we provide some professional commentaries on future growth rates in India as well as a technical picture. These are NOT to taken as recommendations. Remember, professionals can be just as wrong as amateurs. So no action should be taken based on what you read below. All investing decisions must be taken in consultation with your investment advisors based on your own objectives and risk posture.
1. A Fundamental View
This week, Standard & Poor’s raised its India growth forecast to 7.9 percent from 6.2 percent for the year ending March 2016. S&P also raised its growth forecast for 2016/17 to 8.2 percent from 6.6 percent previously. This is a refreshing call from an agency that had warned in 2012 about India becoming the first fallen angel among BRICS.
This upgrade of India occurred as major EM currencies tumbled on Friday with Chinese Yuan, Indonesian Rupiah & Brazilian Real falling to multi-year lows & Turkish lira falling to a record low against the Dollar. What a transformation from August 2013 when Indian Rupee crashed.
This week, Columbia Management issued a detailed report on the Indian stock market titled Three’s is a party in India and described three chief factors for strong earnings growth in India. They point out that, while foreign ownership of Indian stocks is at a historical high among EM & Asia dedicated funds, Global Funds, which are twice as large, still are underweight Indian stocks.
Exhibit 2: India’s allocation in mutual funds globally (underweight/overweight, bps)
Sources: EPFR, FactSet, MSCI, Goldman Sachs Global Investment Research, February 2015.
All this is great but how much of this is priced in?
2. A Technical View
Tim Seymour, a hedge-fund manager with CNBC Fast Money, said on Friday that India is the best growth story in the world and they are the new China. But he added that a lot of good news is priced in the market. Tim Seymour is a smart guy but he is completely wrong in arguing India is the new China. Chinese economy developed & grew via the classic Asian mercantile model that has always gotten into trouble. China’s growth rate is slowing because, simply put, Chinese economy needs a major restructuring. In contrast, Indian economy is structurally sound with drivers of demographics & deep reservoir of consumer demand. But his point about much of the good news being priced in could be right.
Dana Lyons of J. Lyons Fund Management wrote a thoughtful technical piece this week titled Indian Stocks May Be In For Breather After Banner Year . Those who are interested in his discussion of Hemachandra-Fibonacci measurements should read his article. For others, we reproduce his conclusion & his chart:
- “By no means are we putting the nail in the coffin on the Indian rally. To the contrary, we don’t think the significance of the breakout of a year ago can be overstated. It is our view that it validated the presence of a secular bull market in Indian stocks. We are simply saying that, particularly given the close proximity of the 4 key Fibonacci resistance levels, the nearby area may present a challenge for the market in the intermediate-term. Whether that means taking profits, putting off adding new exposure, selling some option premium, etc. is up to each individual. We would not be surprised though to see the Indian stock market take a bit of a breather near here within its very bright longer-term picture.”
A bright longer-term picture is the result when a country’s micro and macro become positively integrated.
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