Equities not the only asset FIIs are flocking to...

Oct 22, 2010

In this issue:
» India may topple China as world's fastest growing economy
» Coal India IPO bidding reaches some surprising proportions
» Textile stocks appear to be the new flavor for FIIs.
» Short term liquidity crunch may drive up borrowing costs
» ...and more!!

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Indian stocks are in fashion. In the span of little over a year, fund managers globally seem to have developed a new found passion for Indian equities. That too at a level never witnessed before.

But make no mistake. This euphoria is not restricted to just Indian equities. Even the debt instruments of corporate India are seeing foreign investors flocking to them in hoards. As per a Moneynews report, international investors have purchased US$ 10 bn in Indian rupee debt in 2010. This is more than the combined amount for the previous eight whole years.

One reason for this is that investor perception of the credit quality of Indian companies is on the rise. And this improved creditworthiness has a lot to do with the overall Indian growth story. Overseas investors have now begun assigning a lot of weight to India's economic resilience. In effect expecting that India Inc's profitability will get much better in the years to come.

And Indian companies have been quick to take advantage of this. They have together sold Rs 1.53 trillion in bonds this year. But the risk here is that of corporate India not being able to deliver on the optimistic expectations. For if that were to happen, overseas investors will not hesitate in fleeing out of the country as quickly as they are coming in. And this time, it will not only hurt stock prices, but also mean a huge spurt in interest rates on these bonds.

 Chart of the day
Today's chart of the day illustrates the differences in the nominal interest rates between India and countries in the developed world. While inflation is certainly in play for the sharp difference in rates, it also reflects the difference in real interest rates. With inflation in India showing no signs of easing the rate differential may only go up in coming months.

Source: RBI, The Economist

China may have become the world's second largest economy. But when it comes to growth, India is expected to have an edge over its Chinese rival. The World Bank has revised China's growth forecast for 2011 to 8.5%, a tad below its estimate of 8.6% for India. Indeed, if the bank's predictions come true, India will, for the first time, become the fastest-growing among large economies. China has been seeing a slowdown in growth off late. Exports are still struggling to recover given the subdued economic conditions in the US and Europe. Inflation is high and the dragon nation has been facing continuous pressure to let its currency appreciate. Thus, weak global growth and fading impact of the stimulus package is what makes the World Bank opine that growth will slow to 8.5% in 2011. Thus, even though India has its own set of problems, it is still touted to topple China when it comes to pace of growth. Whether that happens sooner than later remains to be seen.

The black diamond 'coal' may never have received so much attention as it has done over the past few days. It's now being valued as one of India's hottest commodities, what with the success of the Coal India IPO. While we are not sure how much of this optimism towards the company is justified, some media reports are now equating the company with the big things in life - like countries' GDP. A Bloomberg report suggests that the Coal India IPO attracted bids (of around US$ 49 bn) that was larger than the combined GDP of Latvia and Iceland. That is big, but is of no relevance as the IPO size was just around one-tenth of this and this extra money will go back to the people who do not get the shares.

Textile stocks appear to be the new flavor for FIIs. The reason behind this is the expectation of better cash flows for the companies. This is based on improving traction on both global as well as the domestic front. The textile industry has been going through a slump due to a multitude of factors including slowdown in demand, appreciating rupee as well as higher depreciation and interest costs. However, with the turnaround in demand, the companies hope that all this is set to change for the better. According to a leading consultancy, the country's textile & apparel industry is expected to grow from Rs 3,270 bn (US$70 billion) to Rs 10,320 bn (US$220 billion) by 2020. The textile companies are also finding investor favor as most of them are veering towards becoming real estate players. However, their success in this are remains questionable.

There are very few issues these days that do not get over subscribed multiple times within days of opening. Whether it is a major IPO or an infrastructure bond or a retail bond issued by a leading bank. But with so much allocation to long term funds, short term liquidity has almost dried up. And the RBI's reluctance to ease up monetary policies does not seem to be helping. As a result, companies needing to borrow for the short term have to pay a heavy price. Be it call money rates or yields on government bonds or commercial papers, all have seen a steep rise in the recent months. With inflation showing no sign of softening, interest rates are clearly headed upwards. In such a scenario, companies facing liquidity crunch for temporary period will have to shell out higher price for the same.

India has emerged strong from the global economic turmoil and the subsequent slowdown. And the so-called great Indian consumer story has resumed in full glory. So does this now mean that India is ready for luxury shopping on a large scale? The fact remains that the Indian gene persistently seeks 'value for money'. Not that we compromise on quality, but we always like to ask 'how much for that'. And so, the evidence is out there. We still have only two full-fledged luxury malls operational in India. And new luxury brands are planning an entry only as retailers, not as mall developers. But as consumers our pockets and taste buds are steadily growing and evolving. So at the moment, a mass market for luxury goods and services may still be some way off.

After opening in the positive, Indian markets slumped into the negative territory. The BSE-Sensex was trading 75 points lower at the time of writing this. Realty and metal stocks saw the maximum selling pressure. IT stocks were trading positive after TCS's good 2QFY11 results. The rest of the Asian markets ended mixed with the Hong Kong down 0.4% while Japan closed 0.5% higher.

 Today's investing mantra
"Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day." - Charlie Munger

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