India Election Like Abe In Japan: 10-Year Bull Market Has Started

29 May


  • India has a stable, single-party government after 25 years; weak governance due to multi-party coalition politics has been the primary cause for India’s growth being significantly below potential.
  • Modi, leader of the new government, has a reputation as being pro-business, with the willingness and ability to quickly push through major changes through the complicated, slow and corrupt bureaucracy.
  • Indian economy has significant tailwinds: demographic dividend, large and growing highly educated and skilled workforce, large and growing middle class.
  • Risk: terrorist strike leads to the right-wing government initiating a military confrontation with its nuclear armed neighbor (Pakistan).
  • Risk: ruling party has been accused of having an anti-minority and fascist ideology. With 13% Muslims and 2.4% Christians, this may lead to negative socio-economic consequences.

Recent political environment and latest election

For the last 25 years (beginning in 1989), regional parties gained significant influence over the national government often causing paralysis of governance due to conflicting demands of coalition parties. The dysfunction of the national government peaked in the last few years with analysts concluding that “India and China are often considered to be the world’s rising economic powers, yet if China’s growth has been led by the state, India’s growth is often impeded by the state.” With crumbling infrastructure, rampant corruption, stalled economic reforms and unacceptably long new-project approval times there are legitimate concerns that India’s government is killing its economic miracle. This led to macroeconomic imbalances, pessimism among investors, corporations and the population at large.

Results of the 16th general election in India were announced on May 16, 2014. After 25 years of messy coalition politics, India will now have a stable, single party government. The Bharatiya Janata Party (BJP) won 282 seats, comfortably above the 272 seats needed for a majority. Further, the BJP-led pre-election alliance (National Democratic Alliance, or NDA) won a historic 336 seats (62% of the seats).

Narendra Modi, leader of the new government, has a reputation as a pro-business aggressive leader with the willingness and ability to quickly push through major changes through the complicated, slow moving and corrupt Indian bureaucracy. He got this reputation while he was the Chief Minister (equivalent of Governor in the US) of the Indian state of Gujarat from 2001 to 2014.

This election in India is akin to the historic election of a Shinzo Abe led government in Japan in 2012. The landslide victory by Abe’s Liberal Democratic Party is enabling Japan to undertake historic and radical economic policies aimed at jolting the economy out of its two decade slumber. The Japanese Nikkei 225 Index (Nikkei) rose 67% in the 5 months after Abe’s election. The Nikkei fell from that high, but is currently still up 53% from the pre-Abe period.

Indian economy – significant economic tailwinds

Economic reforms in India began in earnest in 1991 in reaction to a severe balance of payments crisis. The reform was led by Dr. Manmohan Singh, who at the time was the Minister of Finance in the Congress Party led government. It has continued inconsistently since then. The combination of economic reforms, it’s growing and large highly educated and English-speaking workforce and globalization trends helped India become a major exporter of information technology services, which led to its Gross Domestic Product (GDP) growing by 8.3% per annum from 2003 to 2010. However, this growth slowed to 4.7% in 2012, blamed primary on its crumbling infrastructure and regulatory bottlenecks due to a dysfunctional national government.

A 2011 working paper by the International Monetary Fund concluded that while India has been a latecomer relative to advanced Western nations and East Asian economies, it is in the midst of a major demographic transition. That transition started about 40 years ago and will likely last another 30 years. Large cohorts of young adults are poised to add to the working-age population in combination with falling fertility rates. This leads to working age population growing as a percentage of total population. This demographic dividend could add about 2 percentage points per annum to India’s per capita GDP growth over the next two decades.

As per a JP Morgan report India has the world’s third-largest English-speaking workforce, a sizable part of which is also highly educated. Every year Indian universities produce more than 3.5 million graduates. The Indian Diaspora (people of Indian origin living outside India) has achieved significant success in business and other areas (click here, here and here), indicating that under the right government structure, the population has significant potential for global success.

A recent Ernst and Young report concluded that India’s middle class, currently at around 50 million people or 5% of its 1.3 billion population, is expected to grow steadily over the next decade, reaching 200 million by 2020. This will create a rapidly growing and vibrant consumer base for sustained economic growth.

The election result has led to a historic surge in optimism and confidence among local and global investors, corporations and the population at large (see article 1, article 2). This may create a positive feedback loop in the economy by increased capital investment by corporations and spending by consumers, both supported by major economic reform and reallocation of government resources towards badly needed infrastructure projects.

Domestic and foreign investor flows into Indian equity markets

India’s individual investors still have room to boost stock holdings, which account for less than 6% of their assets. In Japan, which has Asia’s biggest stock market, 8.5% of household assets are invested in equities. That compares with 33% in the US and 16% in the Euro Zone.

Foreign Institutional Investors (FII) have invested more than $17 billion in Indian securities since the BJP announced Narendra Modi as its prime ministerial candidate in September 2013. Now that the uncertainty of the unpredictable election has passed, it is expected that FII money may have another surge.

India has well developed capital markets, with the stock exchange in Mumbaiformed in 1875. Significant capital market reforms beginning with the start of major liberalization in 1991, have increased retail and institutional investor confidence in the integrity and reliability of the capital markets in India.


The broad Indian equity market, as represented by the S&P BSE Sensex Index (SENSEX), is trading at an undemanding 15.4x forward price-to-earnings (PE) ratio. Over the last 10 years, it has traded at an average forward PE of 16.3x, with a high of 23.3x and a low of 9.6x (at the bottom of the 2008-09 crises). Small capitalization stocks, as represented by the S&P BSE Small-Cap Index (BSESMCAP), are trading at an 11.7x forward PE ratio. While the SENSEX is trading at both 5 and 10 year highs, the BSESMCAP is trading at a 22% and 37% discount to its 5 and 10 year highs.

Long-term growth in the price of Indian equities is likely to be driven by both expansion of the PE ratio, which is currently below historical averages, and growth in earnings per share.

Bulls argue that over the next 10 years, India’s GDP could grow to US$5 trillion (from US$1.9 trillion) and the market capitalization of its publicly traded equities could grow to US$4 trillion (from US$1.2 trillion). Such growth would depend on, among other things, (1) the new government focuses on significant structural reforms and its willing and ability to push them through the legislative branch of government and ensuring proper implementation by the bureaucracy, (2) reigning in inflation (3) managing the fiscal deficit, (4) managing the current account deficit, (5) the global economic environment, and (6) productive investment by the corporate sector and strong labor productivity growth.

All else being equal, a potentially strengthening Indian currency (Rupee) in the short term due to inflow of foreign capital and in the long term due to improving macro economic variables, will be a tailwind for investors purchasing US listed ETFs that invest in Indian listed equities.

Relevant securities

The following US listed Exchange Traded Funds (ETFs) provide different ways for investors to get exposure to Indian equities: EGShares India Infrastructure Index Fund (INXX) – focused on companies in the infrastructure sector (during this election, the BJP has stated that a key goal is rapid and large projects to improve infrastructure – roads, railway, ports, power infrastructure), WisdomTree India Earnings Fund (EPI) – skewed towards smaller capitalization companies, Market Vectors India Small-Cap Index (SCIF) – exclusively focused on small capitalization companies, iShares India 50 (INDY) – exclusively focused on large capitalization companies.


If there is a terrorist strike in India like the 2008 Mumbai attacks, the right-wing BJP government may initiate military strikes on Pakistan. A direct military conflict between two nuclear armed countries will be a severe negative shock to the Indian economy.

The BJP was founded as the political wing of the Rashtria Swayamsevak Sangh (RSS), which started life in 1925 as a right-wing nationalist paramilitary organization. The RSS is said to have drawn inspiration from European right-wing fascist groups during World War II and is said to have participated in anti-minority (Muslim and Christian) violence. Most senior BJP leaders have an RSS background and Narendra Modi, who will lead the new government, has been a member of the RSS since the early 1980s. Muslims and Christians account for 13.4% and 2.3% of the Indian population. If the new government directly or indirectly supports organized oppression of the minorities in India, it may lead to negative socio-economic consequences.

Since the anticipation of a potential election victory by a Narendra Modi led BJP, the Indian equity markets (SENSEX) has risen 20% compared to a 4% rise in a basket of emerging market stocks. During the same period, small capitalization stocks in India have risen 40%. As a result, some of the upside has already been priced into the stocks. Further, the stocks are likely to be very volatile going forward.

While the NDA government has complete control of the lower house of parliament (Lok Sabha), India’s federal system means negotiating through the upper house (Rajya Sabha), in which they are a minority, and negotiating with state governments for faster implementation of key policies.

The new government will also have to deal with headwinds from structural economic issues of high inflation, high fiscal deficit and high current account deficit. Further bad monsoon rains can have a severe negative impact on the critical agriculture sector.


Last week’s election results in India, which resulted in the first stable, single-party government after 25 years, may have started a long term (10+ year) bull market. Weak governance due to multi-party coalition politics has been the primary cause for India’s growth being significantly below potential. Narendra Modi, leader of the new government, has a reputation as a pro-business aggressive leader with the willingness and ability to quickly push through major changes through the complicated, slow moving and corrupt Indian bureaucracy. Once unshackled, the Indian economy can capitalize on significant tailwinds: demographic dividend, large and growing highly educated workforce, large and growing middle class. While there are risks (detailed above), the risk-reward is very attractive.

(Source : KL Investment partners)


Optimism In India

29 May

Investors love a good reform story. Last year, major reforms in Japan and Mexico captured investors’ attention. This year, stocks in India and Indonesia have rallied in anticipation that a more business-friendly, reform-minded leader will soon be elected.

Last week, the Bharatiya Janata Party won a large majority in India’s lower house of parliament, and it is expected that Narendra Modi will be selected to serve as India’s 14th prime minister. Modi is currently the leader of the state of Gujarat, which has recently seen strong growth thanks to Modi’s policies, which fostered a more business-friendly regulatory environment and large investments in infrastructure. Modi’s leadership record and the BJP’s relatively large majority win, which should make it easier to push through difficult reforms, have helped drive a strong market rally. For the year to date, Indian stocks have risen 12% in local-currency terms (as measured by the MSCI India Index), but thanks to a strengthening Indian rupee, the MSCI India Index (in U.S.-dollar terms) has climbed 18%.

At this time, the MSCI India Index is trading at a forward price/earnings ratio of 15 times, which is in line with the index’s 10-year average. While some optimism about India’s future may be justified, corporate India continues to grapple with many challenges in the near term, including above-target inflation, a high cost of capital, weak infrastructure, restrictive and outdated labor laws, and slowing gross domestic product growth. Stronger corporate earnings growth as a result of anticipated reforms may take a few years to materialize.

A Fund for India Exposure
iShares MSCI India (INDA) tracks a cap-weighted index and can be used to achieve exposure to consumer- and investment-driven growth in India. It is appropriate for use as a satellite holding.

It is important to note that the Indian stock market is one of the more volatile among its emerging-markets peers. Indian equities, as measured by the MSCI India Index in U.S. dollars, have had a five-year annualized standard deviation of returns of 30%, which is more than double that of the S&P 500 over the same span. And like most funds that invest in foreign equities, this exchange-traded fund does not hedge its foreign-currency exposure, so its returns reflect both the change in value of the underlying assets as well as the change in the Indian rupee against the U.S. dollar.

There are many factors that drive the volatility of Indian equities. India has a heavy dependence on foreign fund flows for investment and growth. When markets are in a risk-off mode, or when investors become concerned about a potential stall in economic reforms or a deterioration in macroeconomic fundamentals, foreign funds quickly flow out of Indian equities, which tend to have low floats. These factors, combined with India’s current account deficit, drive volatility in the Indian rupee and, therefore, the returns of this fund. India also has a notoriously unfriendly business environment and is plagued by widespread corruption.

Fundamental View
For much of the past two decades, India’s annual economic growth rates were in the mid- to high single digits. Much of this growth was spurred by “big bang” economic liberalization, which began in 1991. These reforms included the opening up of foreign investment and trade, privatization, improved regulation, and capital-market reforms. Even during the 2008 global financial crisis, India was able to continue growing at around 6% because of the economy’s lower exposure to exports (relative to other emerging-markets countries), stimulative fiscal and monetary policies, and stable growth in domestic consumption.

However, relative to China, India’s growth has lagged for a number of reasons, including significantly lower levels of foreign direct investment and very poor infrastructure, in part because of India’s legendary red tape. In the second half of 2012, the Indian government approved of a new law that would allow foreign companies to hold a 51% stake in multibrand retailers. But additional rules, such as local sourcing requirements and large commitments for infrastructure spending, and the potential for an additional layer of state-level regulations resulted in very low interest by global retailers. To date, only U.K.’s Tesco has made a commitment to enter the Indian market.

Many hope the new leadership will usher in another series of major liberalization efforts that will unlock India’s growth potential. But there continues to be many obstacles to India’s growth. Bewildering government bureaucracy, poor infrastructure, widespread poverty, and low literacy rates will weigh on growth. The industrials sector, which accounts for about 20% of India’s economy, is burdened by highly restrictive labor laws, unstable power infrastructure, and complicated tax rules. The agriculture sector, which accounts for about 20% of the economy but employs about 50% of the population, is highly inefficient. Also, India imports about 70% of its domestic oil needs, which the government and the petroleum industry partially subsidize. A significant increase in the price of oil would weigh on India’s public budgets and current account deficit and drive inflation. Finally, job growth continues to be weak, which is a significant economic and social problem, especially given India’s relatively young population.

Portfolio Construction
This fund tracks the MSCI India Index, which is a free float-adjusted market-capitalization-weighted index designed to measure the performance of equity securities of companies whose market capitalization represent the top 85% of companies in the Indian securities market. The fund employs full replication to track its index.

This fund’s expense ratio is 0.67%, making it the cheapest fund for exposure to Indian companies. During the past year, the fund’s net asset value performance has trailed that of its index by 48 basis points per year, which is lower than the expense ratio. This indicates that the fund is tracking its index efficiently.

WisdomTree India Earnings (EPI) is the largest and most liquid U.S.-listed India ETF, perhaps because it is the oldest. It has more mid-cap exposure relative to other India ETFs. This ETF carries an annual expense ratio of 0.83%.

Matthews India (MINDX) (1.18%) is an actively managed open-end fund that carries a Morningstar Analyst Rating of Silver. This fund has heavy exposure to consumer (30%) and industrial (18%) names but does not own any energy stocks.

Those comfortable with the closed-end fund structure might consider India Fund (IFN) (1.33%) and Morgan Stanley India (IIF) (1.29%), which carry ratings of Bronze and Neutral, respectively. Each fund has a long track record of 20 years.

(Source : Seeking Alpha)

A Tale of Two Charts: Are We 2007 America or 2006 Zimbabwe?

5 Nov

The US equity markets are back in record territory, at least in nominal terms.

The last two times they spiked this way, the following year was pretty brutal. See the next chart, which tracks the S&P 500 and margin debt, the amount of money investors are borrowing against their shares of stock to buy more stock. The chart seems to show that when investors are optimistic enough to use leverage to invest in already-risky stocks, then the good times have pretty much run their course and something nasty is imminent. If recent history is our guide, it is now time to either take some money off the table or short the hell out of the big indexes – or whatever else you like to do when the market looks overbought.


But this conclusion is only valid if we’re in the same stage of the credit bubble as during those two previous sentiment peaks. In 2000 and 2007, to take just one measure of financial stability, the federal government’s debt was $6 trillion and $8 trillion, respectively, versus $17 trillion today. Plenty of other leverage metrics are also way up, indicating that the US is much further down the path of currency debasement than it was just a few years ago. So the question becomes: at what point does a quantitative difference become qualitative? When does the phase change occur? The next chart shows why this question is more than academic. In the early stages of Zimbabwe’s epic hyperinflation its stock market rose from 2,000 to over 40,000 in one year. Presumably a lot of indicators similar to margin debt were by then pointing to a blow-off top and screaming “sell” to students of history.


Then the market proceeded to run up to 4,000,000. What happened? The country ran its printing press flat-out and inflated away its currency, so the price of pretty much every tangible asset, when measured in Zimbabwean dollars, went parabolic. Since equities represent part ownership of companies, and most non-financial companies own tangible assets, their value went up as well. Not enough to increase in real terms (versus gold, for instance) but enough to make shorting that market a really bad idea.

So are we 2007 America or 2006 Zimbabwe? A lot is riding on the answer.

John Rubino

High spirits – Who drinks most vodka, gin, whisky and rum?

4 Nov

ASIA’S growing middle classes are driving demand in the global spirits market. According to IWSR, a market-research firm, consumption last year grew by 1.6% to 27 billion litres—and China, the world’s biggest market, quaffed 38% of that. The national liquor,baijiu, accounts for a whopping 99.5% of all spirits consumed thereso China does not even feature in rankings of the best-known internationally consumed spirits, below. The most popular of these is vodka, mainly because it is drunk in copious amounts in Russia. Russians downed nearly 2 billion litres of the stuff in 2012, equivalent to 14 litres for every man, woman and child. (Unsurprisingly, perhaps, Russians are among the biggest drinkers in the world, according to the most recent World Health Organisation data.) The Filipinos’ taste for gin can be attributed in part to good marketing and to the spirit’s long-established toe-hold in the local market. Ginebra San Miguel, a firm that makes the world’s two best-selling brands, started operations there in 1834.

(Source : Economist)

Who Are The Biggest Whiskey Drinkers In The World?

4 Nov

Hint: it’s not the Irish.

In retrospect, considering India has one of the highest inflation rates in the EM world, a plunging currency and the local central government has made purchases of gold – either foreign or domestic – virtually impossible, converting one’s deflating liquid net worth into liquid alcohol for immediate consumption, with a utility that is instant and needs no discounting, is probably not a bad idea. Finally unlike gold, one can drink whiskey,

(Article by Tyler Durden)

China’s Gold Hoarding Continues: Over 2,200 Tons Imported In Two Years

4 Nov

Paper gold in the developed world may trade based on the whims of marginal momentum chasers, and of course, the daytrading mood of the BIS gold and FX trading desk, but when it comes to physical gold and China’s appetite for it, one word explains it best: unstoppable.

After rising to a gross 131 tons imported from Hong Kong alone in August, which was the second highest ever monthly import tally, September saw a modest decline to “only” 116 tons: “only” because it is still 67% more than the amount imported a year earlier.

The total gross imports since September 2011 is now a whopping 2232 tons. Why September? Because that is when we posted: “Wikileaks Discloses The Reason(s) Behind China’s Shadow Gold Buying Spree.” The chart below confirms precisely said reason.

The gross imports year to date are now over 1,113 tons, 91.3% more than the amount of gold imported through September of 2012.

Netting out exports to Hong Kong, September was virtually unchanged from August, at 109 metric tons vs 110 a month earlier. In other words, September was tied for the third highest net import month in Chinese history.

And yes, we realize that to western thinking buying more when the price is dropping in explicable: ironically even the vast majority of gold bugs are merely interested in a momentum conversion in and out of fiat, thus treating gold as an investable, fiat-denominated asset and not as a currency. China, on the other hand, continues to show that when one’s only intention is to purchase as much gold as possible to preserve wealth and purchasing power and/or unleash the gold standard back on the world (either alone or jointly with Russia and/or Germany), dropping or plunging gold prices are merely the icing on the cake.

(Article by Tyler Durden)

Moneyball of Economics: How One Man Is Knocking it Out of the Park

23 Oct

Andrew Zatlin forecasted 146,000 jobs were created in September.

The Wall Street consensus for Tuesday’s jobs report was 180,000. Citigroup predicted 180,000. J.P. Morgan predicted 195,000. Barclays andGoldman Sachs predicted 200,000.

The actual number from Bureau of Labor Statistics: 148,000.

Andrew who?

Mr. Zatlin has a one-man economic-research shop called SouthBay Research, in San Mateo, Calif. On Monday, he put a note out to his clients predicting the government number would come in at 146,000, about as spot-on as one can get with the dart-game that is predicting the jobs report. (For the record, IHS Global Insight predicted 150,000.)

In fact, he’s had a three good months. While Wall Street continued to project jobs growth of about 180,000 a month, Mr. Zatlin’s forecasts have averaged 150,000, he noted. Actual growth the past three months has averaged 143,000.

Mr. Zatlin, who started SouthBay in 2009, likens his approach to the one employed by Oakland A’s General Manager Billy Beane, whose rigorous use of data mining made famous in “Moneyball” created a new approach to building a baseball team.

“It’s very much a ‘Moneyball’ kind of thing,” he said.

Economics, just as baseball, is steeped in tradition. Economics, to hear Mr. Zatlin tell it, is just as buried in its own past, and missing the great changes taking place in the world. That leads most economists to use outdated methods to measure the wrong things, Mr Zatlin says.

Mr. Zatlin engorges on data, from semiconductor orders to vices like escort services (yes, it’s a sign of discretionary spending). He produces a vice index he says has an 88% correlation to personal consumption figures – and a four-month lead time.

Other researchers are “measuring things that don’t matter, and not measuring things that do,” he said. “We want to know how people are spending their money, how businesses are spending their money, or not, and what do we do about that?”

Take his jobs prediction. Mr. Zatlin says he monitors the hiring practices of more than 1,000 companies, both large and, importantly, small; and separately monitors hiring in 50 metro areas. (While he shared his method, he would not divulge his exact sources.)

“I’m very good at capturing the small and mid-sized companies” that are critical to overall economic growth, he said. He takes this data, and once a week runs it through his system to produce an estimate for jobless claims, and once a month to produce the nonfarm payrolls estimate.

Mr. Zatlin’s background is in economics. He got his economics degree from Kyoto University and MBA from UC Berkeley. But he didn’t come through the finance industry, he came through Silicon Valley (the name SouthBay, in fact, is a reference to the Valley) during the dot-com years. He worked for years for Cisco and other companies there, in business intelligence, harvesting data to pinpoint trends. In fact, he considers his business experience a critical difference between himself and other economists.

The heart of Mr. Zatlin’s approach to economics can be found in something he expresses a funny passion for: semiconductors. These days everything from tablet computers to talking greeting cards has chips in them, he notes, and to him they are the critical ingredient in predicting where the economy is going. “In the industrial age, you track things like steel and oil. In the digital age, you track silicon.”

It was the chip sector led him to predict in March that German factory orders for January would fall  1.5%, when the consensus was for a 0.6% gain.

Orders came in down 1.9%.

But, while he didn’t acknowledge this in an interview, it’s not just the cold numbers that distinguishes him. After all, anybody can pull numbers. What makes the difference is having a way of making sense of the numbers, of having a feeling for what’s happening in the real world, and knowing where to look to find the data to either support or refute your assumptions.

Before MoneyBeat talked to Mr. Zatlin, we joked in an email that we’d have to cut off the Hall & Oates song we were listening to to do the interview – not mentioning the particular song. When we called, he picked up the phone and started singing.

“You’re a rich girl, and you’re going too far…”

Nailed another one.

(Source : WSJ)