David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Inflation 'Bonus'

    Thanks to a subscriber for this heavyweight 168-page report from Deutsche Bank focusing on global emerging markets. Here is a section on India:

    2) Growth-inflation balance has improved and should remain; time now to focus on quality of growth
    India continues to be one of the fastest growing economies in the world, but what has changed in recent years is the quality of growth-inflation mix. Currently India’s real GDP growth is in the 7-7.5% range, with CPI inflation anchored around 4.5%. This is markedly different from FY10-11 period, when real GDP growth averaged about 9.5%, but with CPI inflation running around 11.5%. While achieving high economic growth is important, it is more important in our view to achieve this along with low or acceptable inflation. In fact we would argue that it is imperative to get inflation and inflation expectations down, to achieve higher (and sustainable) growth and investments. From this perspective, there is no trade-off between growth and inflation in the long term.

    In fact, we believe that today’s corporate sector balance sheet stress can be traced back to the developments of the FY10-11 period, when a lot of mal-investments took place, with entrepreneurs believing (wrongly) that high nominal GDP growth, negative real rates and stable rupee environment would continue for the foreseeable period. In reality (and in hindsight), the FY10-11 high growth period was an aberration and led to the formation of macro imbalances, which later would unravel in the form of a currency crisis in mid-2013. In our view, a large part of those mal-investments were caused by persistent and large negative real rates, which gave a false sense of confidence and comfort to the Indian entrepreneurs about potential high return on investments.

    We are reasonably certain that similar type of macro imbalances will not be tolerated or allowed to be formed in the first place, given the changes that have taken place particularly with respect to RBI’s inflation management policy. With RBI formally committed to keep CPI inflation low, in the 4-5% range, and real rates positive in the 1.5-2.0% range, we believe chance of misallocation of capital, based on faulty market signals remain low in the future and would be dealt with decisively and proactively, if it were to manifest somehow. This would ensure that India’s growth-inflation mix remains prudent in the period ahead, which should help investors make decisions regarding long-term investments based on realistic expectations of returns and profit.

    India’s current growth rate is below potential, as per various metrics, including the composite PMI, which has remained stagnant in the last three years. Furthermore, growth is mainly supported by consumption at this juncture (10.5%yoy real growth in FY17), with private investment remaining anemic due to the high leverage of the corporate sector and weak demand. Or in other words, the quality of growth is not optimal at this stage. In our view, a healthy mix of consumption and investment growth needs to be achieved to prevent macro imbalances and inflationary expectations from building up and monetary actions should be calibrated keeping this in mind. The developments of the last two years, where RBI has cut policy rate by 175bps but private investment momentum has weakened further, have raised doubts about the efficacy of monetary policy action to solve the malaise of the private sector.

    We think both RBI and the government have been prudent with their monetary and fiscal policy stance in the past few years, focusing more on sustaining macro stability, rather than choosing the easy way out to prop up growth in the short-term. The strategy instead to focus on long-term structural reforms, like improving ease of doing business conditions in the country, will in our view help support a more robust and sustainable private sector capex cycle in the future, once demand starts coming back. India, in our view, is buying higher growth for the future by adopting a prudent macro policy stance at the current juncture.

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    SoftBank Agrees to Buy Robot Maker Boston Dynamics From Google Parent Alphabet

    This article by Pavel Alpeyev  and Mark Bergen for Bloomberg may be of interest to subscribers. Here is a section:

    This would be Son’s second venture into robotics. In 2012, SoftBank acquired French company Aldebaran Robotics SA and two years later unveiled Pepper, a $1,600 humanoid promoted as the world’s first robot endowed with emotions. Son envisioned building an ecosystem of apps that would let Pepper man storefronts as well as entertain people at home. But culture clashes between the Japan parent and French engineers as well as challenges of creating artificial intelligence capable of understanding natural language has left Pepper underwhelming and with lackluster adoption limited to Japan.

    “SoftBank may not have struggled as much if they bought a better robotics company” instead of Aldebaran, Takahashi said.

    The shares of SoftBank rose 7.4 percent in Tokyo, buoyed by Alibaba Group Holding Ltd.’s 13 percent jump in the U.S. that boosted the value of SoftBank’s stake in the Chinese e-commerce giant to $105.6 billion.

    “Typically, when Son makes a big acquisition, the markets are worried,” said Tomoaki Kawasaki, an analyst at Iwai Cosmo Securities Co. “If this deal goes through the Vision Fund, no one will fret about the impact on SoftBank’s balance sheet.”

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    Theresa May's Disastrous Failure

    Here is the opening of this Bloomberg Editorial:

    U.K. Prime Minister Theresa May's election gamble has faileddisastrously. The consequences are dire for her party and government, and could be equally bad for her country's relationship with Europe.

    May had hoped to increase her Conservative majority in Parliament, and instead has seen it wiped out. The Tories are the largest party in the House of Commons and with the support of Northern Ireland's Democratic Unionists intend to form a government. Directing policy and passing legislation, however, will be vastly harder than before.

    This would be a serious problem under any circumstances, as Britain's previous experience with hung Parliaments suggests. But these aren't just any circumstances. Brexit talks were due to start in 10 days. May's effort to prepare for that challenge has left her plans, such as they were, in shreds. The immediate prospect is great political disorder and maximum economic uncertainty.

    Such is the humiliation of this setback that May might soon choose -- or be forced -- to resign. This offers no relief. The task of finding a new leader would only add to the chaos, and there's no obvious successor capable of uniting the party. But if she hangs on, the question of if and when she goes will linger. Her authority is irretrievably diminished.

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    To the Millions of People Who Voted for Jeremy Corbyn: You Scare Me

    If I'd suggested to you before yesterday that Jeremy Corbyn was on course to outperform every Labour leader since Attlee, you'd probably have thought me away with the fairies.

    But that is exactly what happened. Under Jeremy Corbyn, Labour's share of the vote increased by 9.6 per cent – more than any other leader in any other election since Clem Attlee's 1945 landslide.

    Forgive me if I don't congratulate him.

    In fact forgive me, please, if I say this to each of the 12.8 million people who voted Labour on Thursday: you scare me.

    For months on end – ever since he became leader in 2015 – Jeremy Corbyn's views and alliances have been rammed home.

    You would have had to be living in a cave not to know that the Labour leader described Hamas terrorists as his "friends", that in a war between the IRA and Great Britain he wanted the IRA to win, or that he laid a wreath at the grave of one of the Munich Olympic's terrorists.

    It has been repeatedly reported that he was, until becoming Labour leader, chair of Stop The War, an organisation whose senior members celebrate North Korea as a model society and defend any enemy of the West.

    Then there's Labour's problem with Jews.

    For a time, Mr Corbyn's decades-long ally Ken Livingstone was barely off the news with his Tourette-like spouting of the name Hitler. He might have turned Jew-baiting into a fine art, but that has not been enough for Jeremy Corbyn's Labour Party to expel him.

    I could fill this entire page with examples of anti-Semitic hatred from Labour members and supporters, all of which have been constantly flagged up in newspapers and on broadcast media.

    And I haven't even mentioned John McDonnell's praise of violent rioters or Diane Abbott's view that any defeat of the British state should be celebrated.

    But none of this has made the least difference to 40 per cent of the electorate who were happy anyway to vote for Jeremy Corbyn's Labour Party.

    A bit of Jew hate? Support for the IRA? Pah! Look at the inspiring manifesto.

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    Email of the day

    On before we get too negative:

    Well, before we get too negative, let's remember the good things. This election knocked the SNP for six; and May has a bigger percentage of MPs than Angela Merkel is likely to get. Also, the weaker pound helps my non-UK shares! After that I'm struggling!

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    Wall Street analysts keep one-upping each other to be biggest bull on red hot Nvidia

    This article from CNBC highlights some interesting psychological activity evident in the market right now. Here is a section:

     

    Wall Street is falling over itself to have the most bullish call on Nvidia, the market's best performing stock in the past year. 

    Right after Citi Research raised its Nvidia price target to a street high of $180 Thursday morning, another analyst decided to one-up its peer with a higher price target for the semiconductor company.

    Bank of America Merrill Lynch analyst Vivek Arya told investors to buy the Nvidia shares, citing the large opportunity in the artificial intelligence market Thursday evening:

    "NVDA is trading at a premium multiple, but the momentum could persist given: (1) Only 17% ownership by large-cap active US managers (vs. large-cap semi comps 25%-39% ownership; (2) Potential expanding ownership by Softbank vision fund, per media reports; and (3) Scarcity value as the only proven way to gain exposure to nascent AI/machine learning trend which could be a 10-20x growth opportunity. This weekend's E3 gaming show typically marks start of 2H seasonal strength."

    SoftBank Group bought a $4 billion stake in Nvidia, according to a Bloomberg News report last month.

    Arya raised his price target for Nvidia to $185 from $155, representing 16 percent upside from Thursday's close. He now has the highest price target on the company out of 34 analysts, according to FactSet.

     

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    Renault plans foray into energy market with mega battery

    This article by Christoph Steitz and Edward Taylor for Reuters may be of interest to subscribers. Here is a section:

    Large batteries can help stabilize the primary reserve electricity market, which is responsible for ensuring the grid has at least 50 Hertz. Carmakers can also earn money competing with conventional power stations to guarantee the provision of electricity during periods of high demand or volatility.

    "We forecast the combined market for electric passenger vehicles, electric buses and battery storage to increase eight-fold to over $200 billion by 2020, a five-year compound annual growth rate of more than 50 percent," Berenberg analysts said.

    With about 4 million electric cars expected to be on the roads by 2020, vehicle manufacturers looking at ways to recycle batteries, including Tesla, which already sells everything from solar panels to batteries and electric cars.

    Daimler, BMW, Volkswagen and China's BYD Co Ltd are also exploring so-called second-life storage projects with batteries.

    That includes partnerships such as the recent collaboration between BMW and Vattenfall, in which the luxury automaker will deliver up to 1,000 lithium-ion batteries to the Swedish utility for storage projects this year.

    "What will end up happening is that BMW and Daimler will ... become utilities themselves," said Gerard Reid, founder of Alexa Capital LLP, a corporate advisor in the energy, power infrastructure and technology sectors.

    "They use Vattenfall now because they need to learn but I think the amount of batteries coming back will be so big that I think they'll end up engaging directly with the end customer themselves. And they've got the brand name to do that."  

     

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    Email of the day on monthly Index constituent performance data:

    Hope you are well. I have a question : Where can I get, for any chosen stock market, the percentage of the number of shares whose prices have risen, fallen, remain unchanged, for each calendar month in the last 12 calendar months? Is it available for free in the Bloomberg website somewhere?

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