What the contrast in inflation data tells us - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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What the contrast in inflation data tells us 

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In this issue:
» High yield junk bonds see a rise in prices
» Tech start-ups no longer in favour?
» Fondness for gold hard to curb
» Microfinance once again is attracting capital
» ...and more!


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00:00
 
India has two indices to measure inflation and currently both of them are telling a different story. The latest wholesale price index (WPI) has gone down from 7.24% to 7.14%. But this is in contrast to the consumer price inflation (CPI) index which crossed the double digit mark in December 2012 to reach 10.56%.

The fall in WPI has been perceived as an encouraging sign and so there are increased expectations that the Reserve Bank of India (RBI) will cut rates in its next monetary policy. So far the central bank has been in no mood to oblige on account of high inflation. So it will be interesting to see what its next move will be when the inflation indices throw up such contrasting data.

The woes on the CPI front do not end here. Despite the higher numbers, there are many factors that have not been reflected in the December data on account of the lag effect. This means that the impact of these will be felt in 2013 so that consumer prices could rise much more this calendar year. For starters, it does not take into account the recent hike in railway fares which will show up in either the January or February numbers. Then there is the proposed hike in diesel prices, the increase in minimum support prices (MSP) and increase in wages. The latter more so in the aftermath of the violence at Maruti's plant at Manesar.

Assuming that growth does not pick up, all these indicators point to an increased possibility of stagflation (i.e. inflation and low growth) in 2013. For growth to ramp up, the government needs to ramp up productive spending towards areas such as infrastructure, education and the like. But for now its hands are tied as the fiscal deficit data shows. What is more, it has not been able to stick to its targets for bringing this deficit down. And with elections around the corner, the motivation to drastically bring down subsidies is low. While it may look to reduce this deficit by increasing taxes, that would be another dampener on consumption as purchasing power reduces. Thus, we would not be surprised if 2013 turns out to be another challenging year for the Indian economy.

Do you think that inflation and low growth will continue to haunt India in 2013? Share your comments with us or post your views on Facebook page / Google+ page

01:26  Chart of the day
 
With the consumer price index coming in higher for India in December 2012, how does the country fare when compared to its peers? Not too well we believe. As today's chart of the day shows, consumer prices have remained the highest in India when compared to its peer China, although both have grown faster than most. However, China enjoys a trade surplus as against a trade deficit for India.

* Dec 2012 data for India, Russia, Eurozone, Nov 2012 data for the others
Data Source: The Economist


01:56
 
What do you do if you want to know whether an event you predicted is indeed underway? Well, you just go around looking for evidence to prove yourself, isn't it? It turns out that in financial markets, junk bond prices are an important indicator of whether we are in a bull market or not. So, what is this market telling us at the moment? If an article in FT is to be believed, it is sending a bullish signal for the global economy in 2013. Yes, that's right. Prices for high-yield bonds are on an up move, indicating that bullishness may have come back amongst investors. After returning 15% in 2012, junk bonds are at it again, with gains of around of 1.3% so far this year. In comparison, investment grade bonds have returned minus 0.15%.

But is the overall economy too pointing towards a similar resurgence? We don't seem to think so. No concrete steps have been taken to reduce the overall leverage levels across the developed world. Instead, what we have seen is more profligacy and more money printing. In view of this, the rally in junk bonds is certainly not supported by fundamentals as per us. It is mostly a result of low interest rate policy of the Fed that is forcing people to take undue risks in search for higher yields. And this is certainly not a healthy sign.

02:37
 
People who were investing in the late 90s would remember that the hot favorite stocks were internet start-ups. Then came the dot-com bust and investors saw their money get wiped out in almost no time. In the past few years, tech start ups had again become hot favorites. The main reason was the expected boom, particularly in the social networking companies. Needless to say most of this hype was surrounding Facebook which every investment banker was banking on. But its IPO was a disaster. This has led most investors to rethink their strategy of investing in tech start ups.

Angel investor and PE firms alike are no longer lapping up all tech start ups the way they were prior to the Facebook fiasco. Now, besides the bigger and happier picture, they also want tangible returns. They expect companies to have a bottom line that is growing as well. This is something that all value investors have been screaming about for quite some time. In order for a company to become a good investment, it has to deliver tangible returns to its shareholders. If it does not do that then no matter how glorious the story that has been painted about it, the stock prices will come crumbling down.

03:13
 
We love to buy gold because we believe that gold prices always keep increasing. To some extent, the reverse also holds true. Our immense appetite for the yellow metal is an important factor affecting gold prices. India has been the leading importer of gold, accounting for over 20% of the global demand. So, if India's demand for gold falls drastically, it does have some impact on the prices as well.

Our unabashed fondness for gold doesn't go down well with the policymakers. This is because India mainly relies on imports to meet its gold demand. And this in turn weighs down on India's current account. In the quarter ended September 2012, India's current account deficit stood tall at 5.4% of GDP. Moreover, it is said that in some months gold accounted for half of the deficit. As such, policymakers and the RBI have been finding ways to curb India's gold imports. Last year, the import duty on gold was increased to 4%. The Finance Minister is now suggesting that this be further increased to 6%. But critics say that this would increase the black market trade in gold.

Recently, creation of gold-backed financial products is under consideration. This would possibly help mobilise the huge unproductive stock of the yellow metal in the country. Overall, we think it is difficult to wean Indians off their thousands of years of love affair with gold.

03:44
 
There is clearly a consensus about the fate of emerging markets in 2013. Yesterday we wrote about the opinion of noted investor Mark Mobius. Today a business daily has quoted Boston-based Columbia Management airing similar views. The entity, which manages US$ 340 bn in assets, believes that 70% of the world's incremental global growth will be from emerging markets. This is even with the big markets of China and Brazil slowing down materially. Having said that, Columbia Management also believes that China's economic slowdown has bottomed out. Most money managers do not see double digit growth rates returning to the BRIC economies anytime soon. But the consumption-led growth story driven by a strong sustainable middle class is the most sustainable one. Particularly with the West on a money printing spree, excess liquidity will continue to chase growth in emerging markets. Notwithstanding all the optimism, investors need to beware of valuations.

04:11
 
Microfinance in India has been through a rollercoaster ride. Once highly touted as a pathway to financial inclusion in the country and as a savior for the poor, it became a black sheep after a number of farmer suicides in Andhra Pradesh. The high point of the industry came when SKS Microfinance was listed in a US$ 350 m IPO. But, soon after listing, the stock came crashing down after a spate of regulations against the strong-arm collection tactics of the industry.

But now, things are a lot more in control. Microfinance lenders are once again attracting capital. Grameen Capital, a social-investment bank, says that US$ 144 m of equity has been injected into microfinance groups over the past 12 months. This is more than double the amount in the preceding year. The renewed confidence has come from more uniform regulations. The Indian central bank has set up some guidelines which will keep companies in check. This includes a cap on interest rates, and lenders are barred from lending to anyone with more than one loan outstanding. Well, maybe there is some hope still left for this industry.

04:45
 
In the meanwhile, the Indian equity markets hovered around the dotted line during the post noon trading session. At the time of writing, the BSE-Sensex was trading higher by a few points. While stocks from the realty and FMCG spaces were in favour today, those from the metal and power sectors led the pack of underperformers. Stock markets in other major Asian economies ended on a firm note with Japan and China ending higher by about 0.7% and 0.6% respectively.

04:56  Today's Investing Mantra
"You do not gain as much from periods of unusual prosperity as you lose in periods of depression when you are in business. That is almost an axiom" - Benjamin Graham
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4 Responses to "What the contrast in inflation data tells us"

Manoj

Jan 18, 2013

As many prudent economists will tell us, India is on a path to economic disaster, of it's own making.

Malcolm says it most clearly in his book "the lexus and the olive tree" in 1999 - Nigeria is a developed kleptocracy and India a developing one. He defines kleptocracy as a place where law-makers and law-enforcers believe they are above the law.

Well, UPA has developed kleptocracy to a fine art - fiscal deficits show the utter irresponsibility, yet people think increasing prices are 'reforms' - they are not at all reforms, just knee-jerk reactions.

The government has turned into a property broker and cartel-maker. Can such actors lead india to be a developed, wealthy society?

Like 

Albert

Jan 16, 2013

Both the WPI and CPI are "manufactured" numbers pulled out of a hat. Real, everyday inflation on the streets is much higher. Its time Equitymaster published a study showing how much it has depreciated since independence.

Like (1)

Sthithapragnja

Jan 16, 2013

With utmost humility fortified with abundant ignorance I observe as underon the question psoed thus:
What the contrast in inflation data tell us ??

An apt and appropriate analogy comes to mind in the above context ( the WPI and CPI ??):
The WHOLESALE PRICE INDEX is like a mirage in a desert ?? You feel there is an abundance of water in the distance but when you reach that distant spot , alas ! what a pity, you find to your utter dismay that the water has moved farther and farther away from you?? The WPI is a literal and factual MYTH that only statisticians and the great powers of the elite ECONOMISTS and those at the helm can comprehend and understand(without any impact on them at all !!)
unlike the millions of common citizens who have to painfully/inevitably bear the brunt of the WPI's powerful impact !! and the pleasure (merely like the visual and vicarious one of the pleasant sight of water
(without its actual presence) in desert mirage ??
More like your mirror image ??
I hasten to add with the remark that “THERE ARE LIES, DAMNED LIES and STATISTICS ??

Like (2)

DHIRAJ CHAKRE

Jan 15, 2013

The govt is spending more than budget on non productive activities, such as foreign visits,etc. Hence I think inflation, deficits ,etc problems will remain as such.

Like (2)
  
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