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

    India Plans Record Borrowing to Fund Modi's Growth Ambitions

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    That plan will require borrowing a record 14.95 trillion rupees ($200 billion) to bridge the shortfall, much higher than the 13 trillion rupee consensus, as revenues from divestments are slow to materialize.

    “While the fiscal expansion is expected to be pro-growth, the heavy supply is expected to worry the bond markets,” said Upasna Bhardwaj, an economist with Kotak Mahindra Bank Ltd. 

    Indian bonds fell, with the yield on benchmark 10-year notes rising by as much as 21 basis points. Stocks traded 1.5% higher, paring earlier gains of as much as 1.8%.

    The looser spending puts India on track to post one of the deepest budget deficits among major economies as nations spend their way out of the pandemic-induced downturn. 

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    India on Track to Post World-Beating Growth as Spending Revives

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    “We do have pockets of revenge demand coming in spurts but consumption still needs some hand-holding,” said Shubhada Rao, founder at QuantEco Research in Mumbai, who reckons that the impact of India’s ongoing third virus wave may have been factored in these estimates. “We are looking at 7.5% growth next year.”

    Digging Deeper

    Gross value added, a key input of GDP that strips out the impact of taxes on products, is seen increasing 8.6%. Manufacturing output is estimated to rise 12.5%, while mining sector is seen expanding 14.3%. Agriculture, which provided some cushion to the economy last year, is projected to grow 3.9%
    Gross fixed capital formation, a proxy for investment, is forecast to increase 15%, whereas government spending is seen increasing 7.6%. The ministry sees a 6.9% jump in consumption as pent-up demand drove sales
    The growth numbers, which benefit from last year’s sharp contraction, will serve as a key input to Finance Minister Nirmala Sitharaman’s annual federal budget, due to be presented next month
    India’s growth is seen moderating to 8.5% next year, according to a forecast by the International Monetary Fund released in October

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    Our Market and Economic Observations Heading into 2022

    Thanks to a subscriber for this report from Bridgewater which may be of interest. Here is a section:

    Equity team co-heads Atul Narayan and Erin Miles on other equity markets catching up with the US: Looking ahead, it feels that things are primed for the equity markets that have lagged the US (China, Japan, the UK, Europe, etc.) to catch up. There are several factors at play. First, COVID has been a material relative support to US equities from all channels—favorable sector tilt, less virus economic impact, more support from falling rates (versus, say, Japan, where yields are pegged), and compressing risk premiums, given safe-haven appeal for US equities, especially the FAANMGs. We would expect the COVID impact to gradually fade in the coming year and this to be a relative support for the markets outside the US.

    Second, China is showing early signs of moving toward easing after a year when the structural goals (deleveraging, rebalancing, common prosperity, etc.) were prioritized. This again will be a bigger relative support for economies like Japan, Europe, and EMs that are a lot more exposed to China. Finally, if you look back over the last 100 years, it’s almost always been the case that the winners of a given decade end up being laggards in the next one because of the degree of exuberance (and pessimism) that gets priced in following the winning (and losing) stretch. Given how stretched the relative positioning and pricing is today (for logical reasons), we expect the US versus rest of world diff to finally start to revert after a decade-long off-the-charts performance. The main things we are watching closely are the evolution of COVID globally, China’s policy stance, and the retail flows in the US, which were the biggest support for US equities over the past year and a half.  

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    India's Banking Revolution Has Started Without the Banks

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    That needs to change. The NITI discussion paper on digital banks argues that the funding cost of India’s top nonbank consumer lender last year was more than 7%, while it was less than 4% for a well-capitalized bank. Why not license internet-only banks to take advantage of low-cost deposits, too, especially if they can use technology to fill $400 billion in unmet credit needs of small business owners? 
     

    If banks keep squatting on their entitlements, customers will up and leave. Walmart Inc.’s PhonePe app moves 47% of online money in India, while homegrown Paytm has a 10% share. Alphabet Inc.’s Google Pay, which controls 37% of the market, is using its search expertise to influence customers’ choice of bank deposits. HDFC Bank and its bigger state-owned rival State Bank of India still have a stranglehold on savings. So, they’re the top remitters by default in phone payments. However, when it comes to receiving money, the leader is Paytm Payments Bank. It’s a narrow bank with a limit on deposits per customer. It can neither make loans, nor issue credit cards, though it has finally got access to the central bank’s emergency liquidity window.

    Not allowed to function as a proper bank, Paytm hawks credit for others. Last quarter, third-party loans disbursed by the unprofitable fintech jumped six-fold from a year earlier. Still, the Paytm stock is languishing 27% below its recent initial public offering price. Instead of earning fees by creating $1 billion in yearly credit opportunities for partners like HDFC Bank, the app may be more valuable as a digital bank, lending on its own.  

    A licensing regime that has fallen behind technological innovation has caused a regulatory vacuum. An RBI working group estimates the number of illegal digital lending apps in India at 600. Many of them “are collecting users’ entire phone contacts, media, gallery, etc.” and using that information “to harass borrowers and their contacts,” the group said.

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    Gundlach Sees 'Rough Waters' for Market as Fed Pursues Taper

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    Gundlach, 62, said the reason why Fed Chair Jerome Powell characterizes the economy as strong, but not strong enough to allow for a rate hike at this point, is that the underlying condition is in fact weak -- artificially propped up by an unprecedented degree of stimulus.

    Here are some other takeaways from Gundlach’s remarks:
    He focused heavily on inflation, saying the annual pace of gains in the consumer price index could hit 7% in the next month or two. He ran through numerous inflation measures and pointed out that shelter costs have climbed significantly. He also said it’s possible that the CPI inflation gauge won’t drop below 4% throughout 2022.

    Markets could face more volatility now that the Fed has said it might quicken its tapering program.

    Gundlach reiterated that he bought European stocks for the first time in 12 years, which he disclosed a few months ago. He still owns some of those and they’ve done just OK until recently. He didn’t own emerging-markets equities, though he envisioned a scenario when they might outperform U.S. firms. “We’re looking for major opportunities” and emerging markets could be one over the next few years, he said.

    The dollar has been in structural decline since 1985, he said, reiterating that the twin-deficit problem (that’s the current-account gap and the federal budget deficit) will cause the greenback to fall over time, which bodes well for emerging markets.

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    Mobius Bets on '50-Year Rally' in Indian Stocks as China Slows

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    “India is on a 50-year rally,” even if there are short bouts of bear markets, Mobius said in an interview on Bloomberg Television. “India is maybe where China used to be 10 years ago,” he said, adding the government policies of unifying rules across states will help the country in the long run.

    Mobius’ bullish view on India clashes with those of analysts at Morgan Stanley and Nomura Holdings Inc., who have downgraded the stock market after the benchmark S&P BSE Sensex Index more than doubled from a March 2020 low.

    Emerging-market equities have trailed behind their developed-nation peers this year, held back by losses in China as the government has roiled markets with a widespread regulatory crackdown.

    “People say emerging-markets look bad because China is dragging down the index, but they have to look at other areas such as India that are going up,” said Mobius…

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    Chris Wood Shrugs Off India Equity Downgrades, Says A Selloff Will Be A Buying Opportunity

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    Jefferies’ Chris Wood stays bullish on Indian equities and sees any selloff as a buying opportunity even as global research firms have started downgrading domestic markets citing expensive valuations. “If Greed & fear had to own one stock market globally for the next ten years, and not be able to sell it during that period, that market would be India,” the market veteran said in his latest report said. He remains "remains structurally...

    Jefferies’ Chris Wood stays bullish on Indian equities and sees any selloff as a buying opportunity even as global research firms have started downgrading domestic markets citing expensive valuations.

    “If Greed & fear had to own one stock market globally for the next ten years, and not be able to sell it during that period, that market would be India,” the market veteran said in his latest report said. He remains "remains structurally overweight on India".

    India, from a macro perspective, looks in a similar condition to where it was in 2003 when the country embarked on the last property and capex cycle, Wood said. "Rising interest rates will not derail the upcoming investment cycle. Indeed, they will reflect accelerating growth.”

    “The 10-year bond yield rose from a low of 5% during the 2003-2004 period to 8-9% during the next several years without impacting the then accelerating investment-led cycle,” the report said. Jefferies sees a similar situation now that will help accelerate growth.

    A selloff triggered by a tapering or tightening scare on Wall Street will provide opportunities to add to Indian equities, most particularly if this coincides with a further likely rise in the oil price on an accelerating re-opening of the global economy, he said.

    India's benchmark Nifty 50 has surged more than 26% so far this year, making it the best performer among world's major equity indices. And Jefferies' bullish stance is contrary to what some of the other research firms are saying.

    Morgan Stanley downgraded Indian equities to ‘equal-weight’ from ‘overweight’ citing expensive valuations, following similar moves by Nomura and UBS. Morgan Stanley sees Fed tapering, higher energy costs and a likely rate hike by Reserve Bank of India in February as some of the risks.

    Strategists at UBS downgraded Indian equities saying the valuation gap with Asean markets was “too wide to justify”. Nomura downgraded domestic equities to ‘neutral’ citing unfavourable risk-reward.

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    Quarterly Global Outlook 4Q 2021

    Thanks to a subscriber for this report from UOB which may be of interest. Here is a section: