Modi-nomics: To Awaken the Sleeping Giant

If you were wondering what it will take for the rupee to break out from its sideway movement and for the Nifty to recover from early-2014 losses, Modi is your answer. The more it became apparent that the Gujarat Governor would become the next Prime Minister of India, the stronger the rally of Indian assets.

Interestingly, Modi has displayed a willingness to work with the other keyman of India’s cog-in-the-system: Reserve Bank of India Governor Raghuram Rajan. There were initial fears that Modi may clash with Rajan because Modi, who is pro-business, would like a weaker rupee. Rajan, however, has made it extremely clear that his top priority is to combat inflation – and the quickfire way to achieve that goal is a strong Indian currency. Modi, thankfully, has also made battling inflation his top aim – and he has made good his word, by imposing export restrictions on certain food commodities.

Speaking from the point of an economist, we would really like to see solid economic reforms from India’s new government that could potentially usher in a new era of strong emerging market growth. India is as complex as it is problematic; yet, one cannot deny the huge economic potential it possesses. Efforts to reduce government red-tape, increasing productivity, raising education standards and of course, safer laws for women will be strong steps in the right direction.

Rupee Outlook: The euphoria appears to be fading. One month ago we were pretty confident that the rupee would continue strengthening, but we were always of the opinion that the rupee has to weaken in the longer run. The rupee trended between 61 to 64 per dollar for the better part of 6 months – with no clear improvements in the Indian economy nor the US economy, the rupee should remain status quo in this range. The run of the rupee to near-58 was slightly unwarranted and the position is now unwinding.

The Nifty Index: The Nifty is at an extremely lofty height and it looks extremely toppish. Technically speaking, weekly RSI has crossed 70 for quite some time now, indicating “overbought” status while the index is starting to fall off the upper Bollinger band. This could be the start of a downtrend. However, the P/E ratio of India stocks remain relatively cheap – at 15.3, it is roughly about the same as Thailand’s. The cheap valuations of Indian stocks should give it some support. Using retracements, the Nifty is likely to find support at 7,065 and 6,872.

Who can invest in India?

India started allowing outside investments only in the 1990s. Foreign investments are categorized as: foreign direct investment (FDI) and foreign portfolio investment (FPI). All investments in which an investor takes part in the day-to-day management and operations of the company, are treated as FDI, whereas investments in shares without any control over management and operations, are treated as FPI.

For making portfolio investment in India, one should be registered either as a foreign institutional investor (FII) or as one of the sub-accounts of one of the registered FIIs. Both registrations are granted by the market regulator, SEBI. Foreign institutional investors mainly consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance companies, banks, asset management companies etc. At present, India does not allow foreign individuals to invest directly into its stock market. However, high-net-worth individuals (those with a net worth of at least $US50 million) can be registered as sub-accounts of an FII.

Foreign institutional investors and their sub accounts can invest directly into any of the stocks listed on any of the stock exchanges. Most portfolio investments consist of investment in securities in the primary and secondary markets, including shares, debentures and warrants of companies listed or to be listed on a recognized stock exchange in India. FIIs can also invest in unlisted securities outside stock exchanges, subject to approval of the price by the Reserve Bank of India. Finally, they can invest in units of mutual funds and derivatives traded on any stock exchange.

An FII registered as a debt-only FII can invest 100% of its investment into debt instruments. Other FIIs must invest a minimum of 70% of their investments in equity. The balance of 30% can be invested in debt. FIIs must use special non-resident rupee bank accounts, in order to move money in and out of India. The balances held in such an account can be fully repatriated. (For related reading, see Re-evaluating Emerging Markets. )

Will US Fed rate hike impact India?

Is India well prepared to take the impact of interest rate hike in USA? Due to signs of an upturn in economic growth, the Reserve Bank of India chief also feels that India is very well prepared and that foreign funds are less likely to desert the country. Only reason why economies like India can feel the heat if Fed raises interest rates, as it could lead to capital outflows from emerging markets.

India is in a very good state due to the action it has taken to correct its current account deficit and increase foreign exchange reserves as India was running in high current account deficits leading to a sharp depreciation in rupee last summer. However, now after the measures India has taken, probably it could be a good place where people can leave their money.

Having weathered that storm by taking by taking steps to boost currency reserves and narrow the current account gap, the rupee avoided a re-run of the crisis when the Fed actually began tapering last December. Curbs on gold imports, such as higher duties, helped dramatically narrow India's current account deficit to $32.4 billion in the fiscal year that ended in March from $87.8 billion a year earlier. India also built up its foreign exchange reserves, partly through measures that helped banks raise $34 billion in overseas loans and deposits from the Indian diaspora. India's lumbering economy grew at its fastest pace in more than two years in the quarter ending in June, and strengthening global demand should help boost exports.

Adding to the cheer, falling global crude prices have helped improve the health of public finances by drastically slashing the government's fuel subsidy bill. RBI Chief wants to reduce retail inflation to 6 percent by 2016 from near 8 percent at present, and left interest rates steady early this month, citing inflationary risks from the weak summer monsoon rains.

Are you aware of the Stock Picking Methods?

There are 8 top methods of stock picking that we would indulge into. Let's get into each, one by one and discover how, what and next through each method!

Stock Picking Method # 1: Deep Equity Research

How: Series of comparative analyses industry by industry.

What: Identify standard characteristics of an industry. Locate companies which deviate widely.

Next: Study these more intensively (qualitative and quantitative factors).

 

Stock Picking Method # 2: Wide Stock Screening

 

How: Quick glance at hundreds of snapshots.

What: Pick 5 or 10 that look interesting enough from the earnings or current-asset standpoint.

Next: Study these more intensively (qualitative and quantitative factors).

 

Stock Picking Method # 3: Superstar Stocks in Volatile Market Conditions

 

Find normal level: 7 year average earnings of BSE Sensex or NSE Nifty * 2 * 1/bond rate.

Buy: Start buying diversified portfolio at 20% discount. Scale till 33% discount.

Sell: Start selling at 20% premium. Scale till 33% premium.

 

Stock Picking Method # 4: Unknown Stocks or with Poor Earnings Trend (in Normal Market Conditions)

 

Look for high earnings (current & average) vs price or high net assets vs price + satisfactory earnings.

Be alert & apply judgement to ensure at least average future prospects.

Avoid during bull markets.

 

Stock Picking Method # 5: Unknown Stocks in All Market Conditions

 

Hunt for grossly undervalued stocks at all times.

 

Stock Picking Method # 6: Spooked by Bad News

 

Compare stock price decline vs. true damage from the bad news.

 

Stock Picking Method # 7: Dumped in Bankruptcy

 

Find cases of protracted bankruptcy proceedings.

Wait out the initial speculative period marked by high price compared to probable ultimate value.

Determine approximately the best time for making a commitment in them. i.e. keep comparing price with intrinsic value.

Don’t try to time to perfection. Being several months early is acceptable.

 

Stock Picking Method # 8: Arbitrage

 

Relative prices of securities out of whack.

Industrial & Inflation data weighed over markets

Indian markets sank as Industrial and Inflation data over weighted the growth of stock markets on Monday. Key benchmark indices of India broke its steepest slide in one trading day from its previous lowest record in on August 8.

Market indicators fell short of optimism from investors, as the news of falling Indian Industrial growth in July, fogged long-term view of the market. Further, market indices declined further as unexpected falling charts of Chinese growth hurt world market sentiment. China posted another report showing a weak economic performance over last month raising doubts about top world's economies.

Investors in the day lost interest in the market with lack of attraction in the market, exaggerated with the hiking risk as US Federal Reserve two-day meeting to discuss interest rate hike is starting tomorrow.

The 30-share Sensex lost 245 points holding level at 26,816, below its previous rally above 27,000 level, and 50-share broader index, Nifty shed 63 points closing below 8100 level at 8,042.

Though, both the key indices of Indian markets fell over a percent, broader markets continued to pick up pace as they expanded with growth. BSE small-cap index soared 0.6 percent in the day today as BSE Mid-cap index added another 0.1 percent to its portfolio, performing over expectation of analysts. 

On the sectoral front, Health-care and Realty held their investors closer still continuing in green, when all other sectors posted losses. Health care industries accumulated growth at 0.2 percent and Realty investors helped push the index 0.4 percent higher.

Other sectors including Capital goods, Oil & Gas, Metals, Consumer durable slid over 1 percent capping losses at 2 percent.

While metal shares fell following negative China's economic reports showing its lowest trend in about 6 years. World's second largest economy is downgrading its economy which is turning the viewpoint of investors bringing in rumors of sharper fall in the trading levels. Companies recorded a fall between 1.7 percent and 3.3 percent holding big names like Hindalco, Tata Steel and Sesa Sterlite in the list of Sensex losers.

State-owned bank shares gained in the falling day reporting 4 percent higher after Governor of Reserve Bank of India Raghuram Rajan raised a concern to change appointment procedure in state-owned banks. Andhra Bank, IDBI Bank, Dena Bank, Corporation Bank, Allahabad Bank, and Indian Bank added over 2 percent retaining level with a hike at 4 percent.