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in the near term, including above-target inflation, a high cost of capital, weak infrastructure, restrictive and outdated labor laws, and slowing gross domestic product growth.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.

Fees
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.

Alternatives
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)

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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.

NYSEMarginDebt

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.

Zimbabwe

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)

Foreigners Sold U.S. Assets as China Reduces Treasuries

22 Oct

Foreign investors were net sellers of U.S. long-term portfolio assets in August as China reduced its holdings of Treasuries to a six-month low.

The net long-term portfolio investment outflow was $8.9 billion after a revised $31 billion inflow in July, the Treasury Department said in a statement today in Washington. Net sales of U.S. equities by official holders abroad were a record $3.1 billion, and China lowered its holdings of U.S. government debt for the second time in three months, the department said.

The Treasury data cover a period before the Federal Reserve opted against reducing its monthly bond buying at a Sept. 17-18 meeting. Since then, a 16-day, partial government shutdown slowed growth and created a pause in economic statistics releases that is expected to delay the Fed’s first tapering until March, according to a Bloomberg News survey of economists.

Today’s report showed China remained the biggest foreign owner of U.S. Treasuries in August even as its holdings dropped $11.2 billion to $1.27 trillion. Japan, the second-largest holder, increased its share by $13.7 billion to $1.15 trillion, the figures showed.

The Treasury’s monthly report on the cross-border flow of portfolio assets captures foreign buying and selling of U.S. securities as well as American investors’ transactions abroad. It also tracks holdings of Treasuries by countries.

The total cross-border outflow in August, including short-term securities such as Treasury bills and stock swaps, was $2.9 billion in August, compared with a net inflow of $56.7 billion the previous month, the report showed today.

Treasuries Selling

Foreign investors, both official and private, were net sellers of $10.8 billion of Treasury notes and bonds in August after net purchases of $33.9 billion the previous month, the report showed.

Net purchases of U.S. agency debt were $16.8 billion after buying of $22.2 billion in July, the Treasury said. Investors were net buyers of $2.4 billion of corporate debt in August after net selling of $922 million the previous month, the report showed.

The Standard & Poor’s 500 Index lost 3.1 percent in August. Investors in U.S. Treasuries lost 0.7 percent that month, according to Bloomberg World Bond Indexes. The Bloomberg U.S. Dollar Index, a gauge of the greenback’s value against 10 major currencies weighted by liquidity and trade flows, gained 0.8 percent in August.

(Source : Bloomberg)