Should the Fed action influence your stock investing? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should the Fed action influence your stock investing? 

A  A  A
In this issue:
» Heavy penalty in the offing for loan defaulters
» Why Indian pharma needs to get its act together
» RBI gets stricter with gold loans
» NRIs laughing their way to the bank!
» ...and more!

'Will it or will it not' is the question. Market sentiments world over are in anticipation of the US Fed's stance over pullback of the bond buying program. And Ben Bernanke speech today is expected to outline how much longer the Fed will keep its monetary tap open.

It has been nearly 5 years now since the US central bank brought the lending rates to near zero. This opened the floodgates of cheap money. The stimuli were supposed to help the US economy recover by creating more employment. That has hardly been the case. Drawing flak for inducing cheap money to create asset bubbles, the Fed articulated its target in December 2012. Chief Bernanke resolved to keep interest rate near zero at least until unemployment falls to 6.5%. The unemployment in the US is currently 7.3%. And consumer inflation has yet to cross the Fed's 2% target. Thus if one were to go by the statistics, the US Fed has no reason to unwind its stimuli sooner. But given the proportion of debt crisis the US itself is in, a rational approach to liquidity tightening is in order. Not to mention, the global economy is looking for cues from the US with regard to setting economic imbalances right.

For Indian markets though, there is very little good news in the offing. If the outgoing Fed chief Bernanke chooses to step on the brake before vacating his post, there could be panic in the markets. A sudden and quick pull back of the bond buying program will mean flight of dollars from the country. The rise in interest rates will entice foreign investors to chase safe haven US Treasuries as against emerging market stocks. Besides having an impact on the stock markets it will certainly impact the currency. The already pressurized rupee will come under further pressure if dollars head for the door. Not to mention, India's current account deficit, fiscal deficit, trade deficit and sovereign rating concerns will go back to square one.

Now, since it is not going to be very easy for the US to suck out all the liquidity , the possibility of pullback, if any, being very mild is high. More importantly, it could be very gradual. This too will mean that cheap and short term money will keep finding its way into India.

Thus the Fed's stance, though over hyped does nothing to aggravate or assuage the concerns of Indian investors. India's near term problems are not going away without the government's actions on reforms and policies. The selection of stocks therefore need to be on the basis of those that can tide over the worst rather than those that can benefit from short term speculations.

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01:25  Chart of the day
Rupee dollar rate closer to 70 is no longer a fiction. And the sharp depreciation of the currency over the past year, though alarming, is not a standalone feature. If ones goes by the exchange rates against US dollar, Japanese Yen, Euro and Pound since 1985, the rupee has lost 77%, 92%, 94% and 81% respectively. The volatility in currency rates, therefore, may be unnerving in the short term. However, considering the dynamics of the economies, one needs to figure out if the movement of the rupee against these currencies will be unidirectional.

Fall of rupee against other currencies
Source: RBI

He frequently labels the RBI as the best central bank in Asia and was one of the few people to correctly predict the 2008 US crisis. That's Jim Walker for you. So what's on the mind of the maverick economist these days? Speaking to a leading daily, he outlined how India's central bank has very little room to maneuver monetary policy. He therefore believes that the RBI would maintain status quo on monetary policy scheduled to be announced day after tomorrow. Walker is also a bull on the Indian currency, commenting that it is oversold and should ideally trade at no more than 60 to the dollar. However, this does not make him optimistic on Indian equities and would instead wait for the situation to improve. He couldn't have been more on the ball with respect to our monetary policy. Economic slowdown can be no excuse to lower interest rates. Especially when it is accompanied by high inflation as well as deficits. Thus, what the economy needs is more savings. And which can only be encouraged by raising interest rates and not lowering them.

The banking system in India has seen its bad loans rise in the past 2 years. The reason for this has been the high exposure of banks towards sectors like infrastructure, real estate, etc. As the economic slowdown has hit these sectors in a big way; their stressed performance has severely hurt their capacity to repay their loans. As a result, this the increase in provisioning has hurt the performance of the banks. Therefore the banks would welcome the new RBI Governor's stand to work out measures to stem the rising bad loans in the sector. Dr Rajan has stated that the RBI along with the ministry would work on ways to strengthen the banking sector in the country. Measures would include taking strict action against the loan defaulters. Actions could be as severe as loss of control on the company in case of defaulting promoters. These measures could provide some relief to the banks that have seen their performance come under pressure. This has made them overly cautious when it comes to lending which in turn has further hurt the investment cycle in the country.

In a meeting with the finance ministry, he has also discussed other reforms for the banking sector. As such we are major supporters of reforms. However, those related to the banking sector warrant extra caution because of the need for risk control. Thus, regulators will have to ensure that they maintain the balance between the risks involved and providing the much needed relief to banks.

The gold loan companies have seen unprecedented growth in the last 3 to 4 years. However, the picture is going to be different going ahead. The RBI has now insisted upon stringent documentation for high-value gold loans. Plus there will be a ban on the misleading advertisements of gold loan offerings. Further, branch openings and valuation norms on pledged gold will also come under the scanner of the RBI. To maintain discipline, measures such as PAN card for transactions above Rs 5 lakh and disbursements through cheques for high-value loans have been made mandatory. In addition, the import duty on gold has been increased from 10% to 15% to curb raw gold imports. Thus both the government and the RBI seem to be taking steps that discourage speculations on the yellow metal.

For Indian pharma companies, the US generics market has always been a lucrative one. As reported in Businessweek, with around US$ 100 bn worth of drugs losing patents, the opportunity is huge. This is despite the fact that the market is already quite competitive and pricing pressure is the norm.

But the recent Ranbaxy episode has cast a pall of gloom on the sector. Indeed, Ranbaxy has been at the receiving end with the US FDA for quite some time now. Repeated failure to comply with good manufacturing practices has only tarnished the image of the company. The problem is that in recent times many other pharma companies are also facing issues with the US FDA. For some the nature of the problem has not been that severe and hence they were able to resolve the problem at the earliest. For others, including Ranbaxy, it has not been that simple. The point is that opportunities in the US market will have no meaning if Indian pharma companies allow such manufacturing lapses to occur regularly. Such lapses also become quite unacceptable from a patient safety point of view. At the same time, it would probably be unfair to judge other better run pharma companies based on the Ranbaxy episode alone. At the end of the day, the US FDA has become more stringent. Plus, it intends to increase the frequency of plant visits. And so it is imperative that the sector gets its act together sooner rather than later.

For Indian residents, the sharp depreciation of the Indian rupee is a big negative. It adds further inflationary pressures and eats into our savings and purchasing power. But as it goes, darkness somewhere means sunlight somewhere else. And this is the case with the rupee as well. The Non-Resident Indians (NRIs) seem to be laughing their way to the bank. For them, a depreciating rupee is a lucrative proposition.

Say an NRI sitting abroad could borrow money at cheaper rates abroad. He could then remit the money to India and thanks to the rupee depreciation he would get more rupees than earlier. In addition, he could enjoy the benefits of relatively high deposit rates in India.

And here is proof that the money is pouring into India. As you may know, Kerala receives the highest NRI remittances in the country. As per Indian Express, the state has received remittances worth Rs 750 bn in just the first five months of the current fiscal. That's a significant jump from Rs 600 bn received during the entire previous fiscal. As per Firstpost, foreign banks have identified this opportunity and are set to provide upfront financing for wealthy NRI clients to place large dollar deposits in India. Possibly, the inflow of dollars will provide temporary relief to India on the current account front. However, the flight of these dollars cannot be ruled out as soon as the exchange rates change course.

Buying interest in power, banking and FMCG heavyweights has kept the key indices in Indian equity markets above the dotted line for most of today's session. The BSE Sensex was trading higher by around 88 points at the time of writing. Key indices in Asia closed a mixed bag today while Europe has opened flat to positive.

04:50  Today's investing mantra
"Even the intelligent investor is likely to need considerable willpower to keep from following the crowd."- Benjamin Graham
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2 Responses to "Should the Fed action influence your stock investing?"


Sep 19, 2013

Normally we call the FIIs' fair weather friends. But our own very desi corporates have turned out to be more fair weather friends than the FIIs'. They blame the Government for policy paralysis but except for the few good corporates with ethics, majority have sucked the various benefits and have diverted the funds to other easy and high return investments which do not have any impact on the overall economy but only the personal gains of these individuals and then blame the Government policies, Rupee weakening against the USD and so on so forth. Look at the electronics market and its dependance on imports and the car market. We have only brands from abroad and nothing indigenous and the politicians and the business community blaming the common public for their craze for gold and have been increasing the import duty on the gold and gold ornaments. The Government on the other hand has removed the subsidy on the diesel for the bulk consumers like the railways and state transport corporations and have put the burden on the general public who uses these transport modes and is allowing the concessional, subsidized diesel to the effluent. Actually our economy and the stock market should definitely not be influenced by the US Feds at all. If only we are true to the basics of economics rather election based vote based gimmickry by the politicians definitely we are well cushioned against the global onslaughts the very proof is the 2008 crisis. We should leave the economics and financial matters to the right professionals the true economists and not those from the B-schools who have created all the financial crisis right from Enron to the current sub-prime scam and the fall of Lehman Brothers.


Balakrishnan R

Sep 18, 2013

It is not clear how it is arrived that INR has lost 77 % to USD, 92 % to Japan Yen, 94 % to Euro and 81 % to British Pound in 2013 compared to value of INR in 1985. if I remember correct, the value of INR was about Rs 11 per USD in 1985 and we know it is about Rs 63 per USD. In such a case, it is not clear how 77 % has been arrived at ?

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