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JEast
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Given that the Rupee is getting hammered against the US dollar, what say our Indian investors.  On the one hand it hurts Thomas Cook (more expensive to travel) but maybe it helps Fairbridge Capital's efforts with comparative Canadian/US dollar strength.

 

http://www.financialexpress.com/news/bse-sensex-falls-77-pts-as-indian-rupee-plunges-to-alltime-low-bharti-airtel-shares-hit/1134149/0

 

Cheers

JEast

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FYI:

 

India’s economy

Start me up

Despite a tumbling currency, India’s economy has got more stable in the past year. But a revival in growth remains elusive

Jun 29th 2013 | MUMBAI |From the print edition Tweet..

 

INDIA’S richest man may also be its most optimistic. On June 6th Mukesh Ambani, the boss of Reliance Industries, addressed an auditorium in Mumbai watched by his glamorous wife in the front row and bodyguards with oiled submachine guns in the wings. India’s economy, he said, was in a funk but his faith was “unshakable”. Soon the country would “trigger a major transformation of the world order”. The audience rose in delight.

 

Such bullish talk is rare these days. It is a year since markets got jittery about the risk of an economic crisis in India and nine months since the government responded with reforms meant to kick-start growth. Officials, business folk and economists hunting for signs of life have been disappointed. Asia’s third-largest economy expanded by 5% in the year to March, a decadal low and far shy of the 8% its leaders still claim is its potential growth rate.

 

 

The prospects of a revival have only been complicated by the possible winding down of quantitative easing (QE) in America. India has been a voracious consumer of the hot money that has sloshed around the world in recent years, using it to plug its balance-of-payments gap. On June 26th the rupee hit a record low of 61 per dollar (see chart 1). It has been the weakest emerging-market currency in the past month. Credit-default swaps on State Bank of India, a proxy for the riskiness of India’s government debt, have risen towards the levels of a year ago. India is the riskiest big emerging economy on this measure. Indian officials have been wheeled out to utter the dreaded words: “Don’t panic.”

 

http://media.economist.com/sites/default/files/imagecache/290-width/images/print-edition/20130629_FNC877.png

 

Are the officials right? An apocalyptic scenario is that equity investors and multinational firms head for the exit. They form the vast bulk of the stock of foreign capital in India. This is unlikely. India is still growing faster than most countries and plenty of outsiders remain beguiled. In April Unilever offered $5 billion to buy out minority shareholders in its Indian unit. Net outflows of equity investments have been small so far.

 

Foreign bondholders are far less loyal. They have withdrawn $6.5 billion since mid-May. But the stock of external debt is a lowish 21% of GDP. Providing existing equity investors and multinationals stay put, India can probably handle a debt-buyers’ strike. Foreign reserves are 1.6 times likely financing requirements in the next year (defined as the current-account deficit plus short-term debt).

 

And although the world has got less forgiving as the end of QE looms, India’s stability has improved in some ways since last year. The government’s one unambiguous success is the public finances. Borrowing is still high but under Palaniappan Chidambaram, the finance minister since last August, it is no longer reckless. Control of spending and cuts in subsidies of fuel should mean the overall deficit in the year to March 2014 is 7% of GDP, according to Chetan Ahya of Morgan Stanley. For a while a deficit of 10% seemed possible. At this lower level India’s ratio of debt to GDP should be stable.

 

With an election due by May 2014, there will be pressure to boost spending. A proposed policy to give more food to the poor could add 0.2 of a percentage point to the deficit, analysts reckon. Still, the hope is Mr Chidambaram will see off his wilder colleagues. When other ministers float populist policies that would “devastate the economy”, Mr Chidambaram “says unpleasant things”, in order to shoot them down, according to Prithviraj Chavan, an ex-minister who now runs Maharashtra, a big western state.

 

Inflation also looks less scary, largely due to easing commodity prices. Wholesale prices rose by 4.7% in May year on year, about half the rate at the peak. Consumer-price inflation, at 9.3%, remains more stubborn, as do Indians’ expectations of inflation. But both are moderating.

 

A rout is unlikely, then. The one-quarter decline in the rupee since 2011 may eventually help boost India’s competitiveness and spark a long-awaited boom in Indian manufacturing that makes Godot seem punctual. This is probably the view of India’s central bank, which has not intervened much to support the currency.

 

But in the short term the currency gyrations do make life harder. Firms that have taken a punt and borrowed in dollars will struggle. Dearer fuel imports will raise inflation and the government’s subsidy bill; both effects are manageable but unhelpful, says Rajeev Malik of CLSA, a broker. The central bank will find it harder to ease policy to spur growth. On June 13th its counterpart in Indonesia raised rates, partly to stabilise its currency.

 

 

 

What of that elusive economic revival? It has proved even harder to spot than a tiger in an Indian nature reserve. In the quarter to March GDP grew by 4.8%, with exports, consumption and fixed investment all sluggish (see chart 2). More recent data, such as car sales, industrial-production figures and surveys of purchasing managers’ intentions, have been slack. Exports fell in May. Few firms say activity is picking up, according to Sanjeev Prasad of Kotak, a broker.

 

http://media.economist.com/sites/default/files/imagecache/290-width/images/print-edition/20130629_FNC878.png

 

Consumption could bounce as the public-spending cuts ease and lower inflation raises Indians’ purchasing power. But capital spending is what really matters—it boosts current growth and the economy’s potential. At first glance it is hard to discern a problem. Gross domestic savings and gross fixed investment have dipped but are still about 30% of GDP. This is healthy enough, even by East Asia’s robust standards. Indian officials, Mr Chidambaram included, often suggest that abundant funds and capital spending almost preordain fast growth.

 

Drill down deeper, however, and things are less reassuring, says Sajjid Chinoy of J.P. Morgan. Almost half of all savings are now directed into physical assets that bypass the financial system—people buying gold, for example. The quality of capital investment has fallen, with almost half now spent by households, mainly on construction. The most productive kind of capital investment, by private firms that build factories and buy machinery, has dropped from 14% of GDP in the year to March 2008 to below 10% today.

 

How can the animal spirits of India Inc be revived? Firms are miffed by a lack of land, power shortages and a surplus of red tape. Too many have shot balance-sheets. A third of India’s corporate debt sits in firms with interest costs in excess of operating profits, according to Credit Suisse. State-controlled banks are grappling with bad debts. Bosses are paranoid about anti-graft probes. On June 11th investigators searched the office and home of Naveen Jindal, the head of Jindal Steel & Power, a big industrial firm, and a legislator for the ruling Congress party. India’s national auditor claims the firm was one of many to benefit unduly from the allocation of coal mines. Its shares have since fallen by 25%.

 

The reform charade

 

http://media.economist.com/sites/default/files/imagecache/full-width/images/print-edition/20130629_FNC879.png

 

One possible response to this malaise is a big burst of liberal reform to restore faith that India is on the right track. Don’t hold your breath. When the government announced its package of measures last September optimists hoped it was a moment to rival 1991, when India opened its economy to the world. It is now clear that deep reforms are not going to happen in the near future, reflecting both the profound ambivalence of India’s ageing rulers and a tricky political climate, with a weak coalition and an election looming (see table).

 

 

 

A new tax to replace a mess of local levies on goods and services has been shelved until after the poll. The liberalisation of coal mining and electricity distribution, both government-run bottlenecks, is not discussed. A landmark decision to let foreign supermarkets into a backward food industry still stands in theory, but fluid and onerous fine print means Walmart, Tesco and others are not investing yet.

 

If deep reform is off the agenda, the government can still try the old approach of cranking the bureaucratic machine harder. Mr Chidambaram, once viewed as insufferable, is now praised by Mumbai’s tycoons for taking notes as they grumble about stalled projects. Since December a new committee headed by the prime minister, Manmohan Singh, has tried to push forward projects tangled in red tape: Mr Singh now personally reviews the rules for digging mud near road projects, for instance. But the committee has not made a meaningful difference. On The Economist’s count, the fresh capital investment it has sanctioned (rather than discussed or delegated to other bodies) amounts to 0.4% of GDP, spread over several years.

 

Other measures are more useful. To resuscitate the power industry the government is trying to allocate scarce domestic coal more efficiently among power plants and allow them to recover the cost of expensive imported coal. This is a sticking-plaster: for plants commissioned after March 2015 it is still unclear where fuel will come from, says Amish Shah of Credit Suisse. But it should help. Regulated gas prices are likely to be lifted to encourage more investment in offshore fields. Foreign-investment rules are being further relaxed, at least in theory. The government has yet to recapitalise dud state-run banks but that would make a difference, too.

 

None of these measures will get India back to an 8% growth rate. Some are a throwback to the pre-1991 “licence Raj” era, when officials tinkered incessantly with the rules. But they might just keep India’s economy chugging along for a couple of years as the world adjusts to the end of ultra-loose monetary policy. When the dust settles, the hope is that India’s politicians will finally be more serious about fighting graft and enacting reform.

 

 

I thought the broker's name was quite funny :D

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Guest valueInv

Looks like there is more room to drop. If it happens or not is a different question - I believe the inflation there is very high ( ~10% ) and has been that way for a long time.

 

http://economictimes.indiatimes.com/markets/forex/rupee-still-17-6-per-cent-overvalued-nomura/articleshow/20794652.cms

 

What is the relationship between inflation and currency value? For example, you could buy a fixed deposit yielding 9% in India but unofficial inflation number is at 11%-13%. Here we are in the US with inflation at less than 2%. So the only reason to not put money in India is the expectation for the currency to devalue. Is that a given due to inflation?

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Inflation is a man made problem - where more money chases the same goods/services. The money is printed by the government. The most severe recent example is in Zimbabwe.

 

A highly inflated currency will eventually lose value - the time horizon being the ability of the government to keep it under control. India obviously is more capable here compared to Zimbabwe.

 

 

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  • 1 month later...

The carnage continues and seems to be intensifying:

 

I suspect incredible values will be uncovered in India over the next few quarters.

 

Its not only the Indian Rupee, take a look at the Rand, Turkish Lira,  Brazilian Real and JPY(!). All of them have fallen between 15 -25%.  I am watching INDY(India Nifty 50 ETF), INCO(India Consumer ETF) and Bidvest.

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Where did all the US dollar bears go? I recall many members pounding the table of how bad the US dollar was and will continue to be.  Of course I agreed with all the discussion points, but I only had one question.  The question was US dollar bear -- compared to what.

 

Fast forward from 3-4 years ago, it appears that the only thing that has worked was compared to the Yen!!  From the movie Chronicles of Riddick, and to paraphrase Aereon of the Elemental race (based on mathematics/calculation) near the end of the movie she says "what were the odds of that happening."

 

Cheers

JEast

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Where did all the US dollar bears go?

 

Yes, the people who have been crying about QE causing future hyperinflation seem to have disappeared. I guess Ben Bernanke isn't so evil after all.

 

But more seriously, I think this falling Rupee is going to hurt India badly, mostly because of its fuel imports. There are two ways to solve it - fiscal answer and monetary answer. The monetary answer is to raise interest rates to shore up inflation, however the main risk is sinking GDP growth, as a result it is very unpopular. The fiscal answer is to steadily remove regulations, reduce the size of government, and instigate pro growth policies, but that is politically difficult. Both positions are painful, and given that India is heading into an election year, rising commodity prices is really going to attack the ruling UPA govt, given their "pro-poor" airs. If the government does nothing, Rupee will continue to be low, which will eat away at GDP growth, if central bank acts, it will raise interest rates, which will again hurt GDP growth. The answer has to be fiscal policy which resides with the government. I don't believe the government has the ability or willingness to act. I think all roads point to the economy struggling. Feel free to point out holes in my logic.

 

I think it would be a mistake to dive in looking for "value".

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Since India's demographic peak is not until 2050 and long term bull markets based on solar cycles average 33 years I am looking to invest in India around 2017 then hold for an expected 10 fold gain at least. In the meantime I am keen to learn of the best Buffet type stocks in India so I will pay attention to this thread. Thanks to those who can help identify such stocks.

 

India is fortunate that its citizens hold so much gold so the country suffers less wealth loss which normally makes such depreciations so harmful. The J- curve means that initially the trade deficit will worsen so the currency will over-shoot. I would expect the bounce back to be stronger than most because the wealth effect caused by the gold savings will allow locals to respond quickly as competitiveness improves driving investment which in turn attracts back the capital which fled.

 

The outsourcing industry with few foreign inputs seems a likely beneficiary.

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I am no currency expert, so I may be way off(and wrong), but what I wonder about goes back to qe-wasn't this an attempt to export inflation to the world  by flooding them with dollars, forcing them to exchange dollars into their host currency to prevent inflation? If so, is it happening in reverse,ie., as overseas currencies weaken, isn't it exporting inflation over here?

I think the solution to this puzzle involves a belief that future dollars exported overseas will be less, but I'm still hazy on this. i guess the question is; Are the dollars exported overseas coming home?

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Where did all the US dollar bears go?

 

Yes, the people who have been crying about QE causing future hyperinflation seem to have disappeared. I guess Ben Bernanke isn't so evil after all.

 

But more seriously, I think this falling Rupee is going to hurt India badly, mostly because of its fuel imports. There are two ways to solve it - fiscal answer and monetary answer. The monetary answer is to raise interest rates to shore up inflation, however the main risk is sinking GDP growth, as a result it is very unpopular. The fiscal answer is to steadily remove regulations, reduce the size of government, and instigate pro growth policies, but that is politically difficult. Both positions are painful, and given that India is heading into an election year, rising commodity prices is really going to attack the ruling UPA govt, given their "pro-poor" airs. If the government does nothing, Rupee will continue to be low, which will eat away at GDP growth, if central bank acts, it will raise interest rates, which will again hurt GDP growth. The answer has to be fiscal policy which resides with the government. I don't believe the government has the ability or willingness to act. I think all roads point to the economy struggling. Feel free to point out holes in my logic.

 

I think it would be a mistake to dive in looking for "value".

Actually the broader market (ignoring the Sensex) is already pricing in quite a few of the worries that you have mentioned. The midcap index falling 25% since the start of the year, complete lack of retail participation, losses on liquid and short-term debt funds, continuously increasing NPAs on bank balance sheets etc. are all the positive signs that point towards fear in the market. And if one is greedy when others are fearful it usually leads to decent stock returns.

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Actually the broader market (ignoring the Sensex) is already pricing in quite a few of the worries that you have mentioned. The midcap index falling 25% since the start of the year, complete lack of retail participation, losses on liquid and short-term debt funds, continuously increasing NPAs on bank balance sheets etc. are all the positive signs that point towards fear in the market. And if one is greedy when others are fearful it usually leads to decent stock returns.

 

How do you know it is "priced in"?  :) Certainly the market is lower now, but that doesn't mean the market will have predicted the full extent of the problems. My opinion is that there will be further macroeconomic deterioration, and I don't believe market will stabilize until there is some change in fundamentals. Given that it is becoming election season, for the near future, I think any economic catalyst seems unlikely.

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How do you know it is "priced in"?  :) Certainly the market is lower now, but that doesn't mean the market will have predicted the full extent of the problems. My opinion is that there will be further macroeconomic deterioration, and I don't believe market will stabilize until there is some change in fundamentals. Given that it is becoming election season, for the near future, I think any economic catalyst seems unlikely.

you will have to look at the company level to make that determination. The 'market' is basically 30 top companies or 50 companies (NSE index), followed by most foriegn investors. However there are several companies in the midcap or small cap space, which savant mentions which have dropped by 50% or higher. These companies are domestic, not exposed to exchange risk and other than the economic slowdown, should do fine over the long term.

the situation is like nov-dec 2008 in the US. question is how soon will the march 2009 happen :) ...though in all fairness, majority of the banks dont face that level of stress (other than the public sector banks)

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How do you know it is "priced in"?  :) Certainly the market is lower now, but that doesn't mean the market will have predicted the full extent of the problems. My opinion is that there will be further macroeconomic deterioration, and I don't believe market will stabilize until there is some change in fundamentals. Given that it is becoming election season, for the near future, I think any economic catalyst seems unlikely.

you will have to look at the company level to make that determination. The 'market' is basically 30 top companies or 50 companies (NSE index), followed by most foriegn investors. However there are several companies in the midcap or small cap space, which savant mentions which have dropped by 50% or higher. These companies are domestic, not exposed to exchange risk and other than the economic slowdown, should do fine over the long term.

the situation is like nov-dec 2008 in the US. question is how soon will the march 2009 happen :) ...though in all fairness, majority of the banks dont face that level of stress (other than the public sector banks)

Yup. Plus quite a few smallcap and midcap stocks that have been around for 25+ years with no debt, significant cash on balance sheet, 5%+ dividend yield, are trading for less than cash on balance sheet even while the operating business continues to churn out cash flow. Their business model isn't one that generates 20%+ ROIC but the significant discount to cash on balance sheet and a high dividend yield provides an attractive alternative to cash.

Things could get worse on the macro and keeping some dry powder makes sense, but to completely sit out waiting for cheap stocks to get cheaper is not for someone like me who is incapable to predicting the macro.

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50%+ yield... wow

wondering which ones...

 

How do you know it is "priced in"?  :) Certainly the market is lower now, but that doesn't mean the market will have predicted the full extent of the problems. My opinion is that there will be further macroeconomic deterioration, and I don't believe market will stabilize until there is some change in fundamentals. Given that it is becoming election season, for the near future, I think any economic catalyst seems unlikely.

you will have to look at the company level to make that determination. The 'market' is basically 30 top companies or 50 companies (NSE index), followed by most foriegn investors. However there are several companies in the midcap or small cap space, which savant mentions which have dropped by 50% or higher. These companies are domestic, not exposed to exchange risk and other than the economic slowdown, should do fine over the long term.

the situation is like nov-dec 2008 in the US. question is how soon will the march 2009 happen :) ...though in all fairness, majority of the banks dont face that level of stress (other than the public sector banks)

Yup. Plus quite a few smallcap and midcap stocks that have been around for 25+ years with no debt, significant cash on balance sheet, 5%+ dividend yield, are trading for less than cash on balance sheet even while the operating business continues to churn out cash flow. Their business model isn't one that generates 20%+ ROIC but the significant discount to cash on balance sheet and a high dividend yield provides an attractive alternative to cash.

Things could get worse on the macro and keeping some dry powder makes sense, but to completely sit out waiting for cheap stocks to get cheaper is not for someone like me who is incapable to predicting the macro.

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long term bull markets based on solar cycles average 33 years I am looking to invest in India around 2017 then hold for an expected 10 fold gain at least.

 

Wait, what? What do you mean solar cycles?

John Hampson has an excellent site explaining how to invest with solar cycles. Solar cycles coordinate with economic cycles. For instance every solar maximum since 1900 has been followed by a recession within 12 months. Solar maximum was probably last May so the correlation predicts recession by next spring. Generally you buy around solar minimum and sell at solar maximum. Long term trends often last 3 solar cycles. What you do is look at long term demographic peaks and invest about 3 solar cycles previously then average in around solar minimum and average out at solar maximum. The US demographic peak was 1999 so check out the results looking at the chart.

 

I am suggesting to the board to apply the same strategy but with India as it demographic peak is around 2050. So start to average in around solar minimum then average out at solar maximum then repeat for 2 more cycles until the demographic peak in 2050.

 

Some people say that they can't match Buffett's long term returns because Buffett was just lucky to start investing in the 1960s during a long term boom in the right place. I say that anyone who understands the value investing technique applied on this board then uses it in India starting at the next solar minimum has the same opportunity to enjoy the same demographic wind on their backs that Buffett enjoyed investing in the US.

 

http://solarcycles.files.wordpress.com/2012/02/recessions2.png

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long term bull markets based on solar cycles average 33 years I am looking to invest in India around 2017 then hold for an expected 10 fold gain at least.

 

Wait, what? What do you mean solar cycles?

John Hampson has an excellent site explaining how to invest with solar cycles. Solar cycles coordinate with economic cycles. For instance every solar maximum since 1900 has been followed by a recession within 12 months. Solar maximum was probably last May so the correlation predicts recession by next spring. Generally you buy around solar minimum and sell at solar maximum. Long term trends often last 3 solar cycles. What you do is look at long term demographic peaks and invest about 3 solar cycles previously then average in around solar minimum and average out at solar maximum. The US demographic peak was 1999 so check out the results looking at the chart.

 

I am suggesting to the board to apply the same strategy but with India as it demographic peak is around 2050. So start to average in around solar minimum then average out at solar maximum then repeat for 2 more cycles until the demographic peak in 2050.

 

Some people say that they can't match Buffett's long term returns because Buffett was just lucky to start investing in the 1960s during a long term boom in the right place. I say that anyone who understands the value investing technique applied on this board then uses it in India starting at the next solar minimum has the same opportunity to enjoy the same demographic wind on their backs that Buffett enjoyed investing in the US.

 

http://solarcycles.files.wordpress.com/2012/02/recessions2.png

 

Please provide a cause/effect relationship for the theory?

 

BeerBaron

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