Are bullish foreign fund managers walking the talk? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are bullish foreign fund managers walking the talk? 

A  A  A
In this issue:
» CII Business Confidence Index suggests optimism among corporates
» IMF supports Dr Rajan's stance on inflation
» Urban consumption could be back in the driver's seat
» China's slowdown clouds Indian steel sector
» ...and more!

India has broken the jinx of below 5% growth that had been haunting it for 9 quarters. Over the last few months, the consumer outlook index in India has risen by around 8%. The timing of fall in the prices of key commodities, such as crude oil and select metals could not have been better. Not only have these helped the rupee get stronger and curb inflation, but also eased India's fiscal deficit concerns. Needless to say, the upgrade in India's sovereign rating has been the icing on the cake. But are these enough to attract the biggest long term funds to India?

Well, India's huge demographic dividend has been there for long. However, without the urgency to push forth necessary reforms, growth prospects were in the back burner. Needless to say India was a pariah of sorts for the biggest global investment funds until a few months back.

However, the government's focus on reviving the manufacturing sector through the 'Make in India' campaign and the resolve to liberalize tortuous trade barriers has revived the interest of global investors. Among the BRIC nations, India is considered to have the best potential. The country is witnessing inflow of foreign funds from investors who want to be a part of the growth story. However, what is most interesting is that some of the key foreign funds are actually walking the talk by increasing their exposure to India. Infact CLSA's Chris Wood, one of the best strategists in Asian markets considers India his favorite market in the region. And it's not just an empty talk. He has 41% of his long only portfolio allocated to India.

While global investors are showing interest in India and are confident about its growth prospects, the Indian economy and markets offer huge promise for the Indian investors as well. The Indian economy has a huge tailwind of growth in capital investments at a time when commodity prices are low with consumerism rising and business confidence improving. All we need for a Golden Decade Megatrend to be unleashed is the catalyst of reforms. And recent developments suggest that the same is not elusive anymore.

We believe the Indian economy is set to witness new Megatrends. These will be huge tailwind for the corporate profits and wonderful opportunity for investors to ride the growth wave. Combined with the right investing strategy, these factors could lead to tremendous wealth creating opportunities investors. This is where Tanushree, Managing Editor of The India Letter, and her team are playing an important role. They are already on their toes to identify such the companies that will benefit from the key signals of the Megatrend, well before others do. They will be coming out with stock ideas every month that will help you profit from what they call The Golden Decade Megatrend. So if you belong to the set of investors who would like to ride the growth wave in the coming decade, we strongly recommend you to acquaint yourself with the seven signals of the upcoming Megatrend and the opportunities emanating from it right away. Since such opportunities do not present themselves every now and then.

Do you believe India has got the right mix of elements that can catapult economy to growth path? Let us know your comments or share your views in the Equitymaster Club.

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02:10  Chart of the day
Since the Modi government has come to power, the word 'optimism' has been mentioned innumerable times by the Indian media. Here is one such example again. "The business confidence index shows continued optimism for second quarter in a row" mentions an article in Mint. The firm resolve shown by the new government to kick start the growth cycle has fuelled optimism amongst corporates. And the big picture theme in India looks full of positive vibes.

As can be seen in today's chart, the CII Business Confidence Index stood at 57.4 in 2QFY15. This is the second recurring quarter where the business confidence has risen. It may be noted that a number above 50 reflects optimism and vice-versa. The survey is based on the responses from 150 industry leaders comprising large, medium and small scale sectors. A wide sample is a reflection of sentiments amongst the corporate. While PM Modi may have been able to lift sentiments it is the execution part which is left now. If execution comes in and expectations are met, we are definitely headed for a golden decade.

Feel good factor going strong among corporates
Note : The number below 50 suggests weak business confidence while above 50 suggests positive confidence

The RBI has certainly come a long way since it locked horns with the government over Monetary Policy. The Finance Minister in the previous government was known to openly criticize the RBI's anti inflationary stance. Not that the RBI is currently fully satisfied with the cooling down of food inflation. In fact its status quo on interest rates is in anticipation of bold measures to keep inflation under check for a prolonged period. However, the government too seems to be supporting the RBI's stance. And it is not just the government but also the International Monetary Fund (IMF) that has come out strongly in RBI's favour. It has in fact urged the RBI to consider raising rates if inflation raises its ugly head. IMF has also suggested that the government should pursue structural reforms to push growth instead of relying on lower interest rates. Now, while Dr Rajan will have enough support for his stance on inflation, it is for the RBI to take better control on the quality of assets in the banking sector as well.

While we mainly follow the bottom-up approach for stock picking, it is important to understand larger structural trends developing in the macro economy. For instance, over the last five years the fast growing rural consumption has been a major theme in India. As per a leading financial daily, rural consumption has grown at 14.3% annually since 2005. Urban consumption, in comparison, has grown at 13.3% annually during the same period. This has certainly benefitted companies that focused their business strategies on tapping the growth potential in rural India.

The question is: What will be the trend in the coming five years? If an article in the Economic Times is to be believed, urban consumption could be back in the driver's seat. Let us understand the reasons that have led to this conclusion. Firstly, campus hiring in major engineering and business schools has shown significant improvement. Another indicator is the Naukri Job Speak index which has grown by 33% in the last one year. It is worth noting that between FY10 and FY13, the index grew at a mere 6.5% compounded growth rate.

Then there are factors which hint that rural incomes may not rise at the same pace as they have in the past. Government spending on schemes such as MGNREGA has become flat. It must be noted that from FY07 to FY13, the minimum selling prices (MSP) of crops increased at 10.5% to 14% CAGR. This trend may not continue. For instance, in FY14, the MSP was hiked by less than 5%.

While these are indeed interesting points that may help investors in identifying potential macrotrends in the economy, these are not exhaustive factors. And while spotting the trends can be rewarding, invest only in companies that have sound fundamentals.

The future outlook of the steel sector seems to have diminished. We say this because the demand estimates by the World Steel Association have been lowered from the predictions it made six months ago. Original estimates were 3.1% and 3.3% for 2014 and 2015 respectively. The new figure stands at 2% for both the years. A key reason for this is China's slowdown - considering that it accounts for just about half of the consumption; while demand in rest of the markets is expected to remain largely changed.

Can this have an impact on Indian steel sector. Well... it certainly cannot be ruled out. India's finished steel production stood at 85 m tonnes in FY14. Export of finished steel stood at 5.6 m tonnes while the country imported about 5.4 m tonnes of steel. While imports may not be a big threat for local steel manufacturers at the moment, it could be a problem area in the future considering the possibility of an adverse impact of lower commodity prices and cheaper imports.

In the meanwhile, the Indian stock markets slipped deeper in the red in the post noon trading session. At the time of writing, BSE-Sensex was trading lower by 160 points (0.6%). Majority of the sectoral indices were trading in red with metal and engineering stocks witnessing the maximum selling pressure. Most of the Asian stock markets were trading in the red with Japan and Taiwan being the biggest losers. However, the Chinese index was trading in the green. European markets have opened the day on a negative note.

04:50  Today's investing mantra
"The key to making money in stocks is not to get scared out of them." - Peter Lynch
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