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Posted on 09-Nov-2018 Comments  0

Equity MF Paradox

Why equity MFs continue to see inflows despite FPI selling?

Two pieces of data stood out in stark contrast in the month of October 2018. On the one hand FPIs were compulsive sellers in the Indian markets. The FPIs sold equity to the tune of Rs.29,000 crore and debt to the tune of Rs.10,000 crore taking the total FPI selling for the month of October to Rs.39,000 crore. Over the last 10 months since the beginning of 2018, FPIs have sold more than Rs.1 trillion worth of equity and debt in India. This trend is not restricted to India alone. FPIs had sold emerging market equities to the tune of $17 billion in October alone. But, on the other hand, mutual fund inflows went on unabated. Inflows into equity funds were to the tune of Rs.12,622 crore in the month of October with SIPs making up nearly Rs.7,965 crore during the month, which is a record. What explains this dichotomy?

It is essentially a dollar trade

FPI selling in most EMs is predicated on the view that dollar strength will keep the pressure on the EM currencies. Higher growth and a more hawkish view by the US Fed are likely to keep the dollar stronger and that would logically make the EM currencies weaker. It is this long dollar trade that most FPIs have been betting on. We have already seen the rupee dipping from Rs.64/$ to Rs.74/$ in just one quarter and that has surely spooked the FPIs. They have been selling out of India so as to at least protect the dollar returns possible.

FPIs also have valuation worries

FPIs have also worries about more structural factors in India. For example, the trade deficit has been widening and there are expectations of a global slowdown if the trade war worsens. FPIs have also expressed worries over two major issues. Firstly, they are worried about the NBFC liquidity crisis in the aftermath of the IL&FS fiasco. Secondly, they are also worried about corporate governance issues after specific cases like ICICI Bank, PC Jewelers, Infibeam and Dewan Housing came up. That has kept them wary of Indian equities.

SIPs are still working

Sustained flows to the tune of $1.2 billion per month are not a one-off act. It is a clear signal that Indian retail investors are starting to believe in the power of SIPs and rupee cost averaging. That has worked consistently for most retail investors in India.

TINA factor is at work

For a lot of retail investors, there is also the TINA factor at work. RERA and note ban have crimped the demand for gold and real estate. Bonds and FDs are becoming less attractive due to falling yields in India. Equity funds (especially via SIPs) appear to be the answer. It may not give  instant gratification but it is a surer way to move ahead. For MFs it is certainly a reason to celebrate!

Wrong, Dr. Rajan

Why Dr. Raghuram Rajan is wrong about note ban and GST

In many ways Dr. Raghuram Rajan has been the equivalent of an Elvis Presley of central banking. With him around, there was never a shortage of spoken words or decisive action. To his credit he did manage the near external crisis in 2013 appreciably. However, he may have gotten his views grossly wrong when he blames GST and note ban for the weak GDP growth in India.

New Hindu rate of growth

In an interesting analogy, Dr. Rajan has called 7% growth the new Hindu rate of growth for India. It used to be 3.5% in the old days prior to liberalization. While that can still be debated it is wrong to say that 7% plus growth is really bad. It is hard to think of one country that is growing at over 7% annually in these conditions. To be fair, there are some countries in Africa and Central Asia that are showing that kind of growth but in India we are talking about a GDP base of $2.65 trillion. Our neighbor, China, is struggling to grow at 6.5% and has already warned of an impending slowdown in GDP growth. This is in comparison to a sustained growth of over 10% for over 20 years. Also, it is not practical to expect that kind of GDP growth in India when the world GDP is likely to grow at just over 3.5% even by the most optimistic estimates. India would need time to resolve its banking mess and also to realize the full benefits of GST. To call 7% as a new Hindu Rate is grossly erroneous.

Did demonetization do it?

To be fair, the growth has fallen by less than 100 bps since the demonetization. What we are ignoring is the likely negative repercussion on industrial credit if banks had not been flush with liquidity. Banks became flush with money only due to demonetization as it put nearly $200 billion into the coffers of the banks. In one shot, this move ensured that the gap in transmission of rate cuts, which Dr. Rajan complained about, also got reduced to zero. Of course, credit growth did not pick up in a big way but that was more because Indian industry was operating with a capacity utilization rate of 70%. The production and growth happened without any worthwhile credit demand or capacity expansion. In fact, it was the note ban that smoothed the liquidity concerns of banks in a big way!

Why blame GST for growth?

It also does not make eminent sense to blame GST. It has started the gradual formalization of the unorganized sector, expanded the tax base and improved compliance. To that extent, GST was a policy investment made by the centre and its fruits would be more visible in the months and years to come. Growth slowdown is a global phenomenon and India cannot be divorced. To say that it was caused by demonetization and GST is not only rich but also a clear distortion of the economic truth! 

Iran Sanctions

Why the Iran sanctions are unlikely to be effective this time around

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The US sanctions on Iran became effective from 05th November but the markets hardly reacted. On the contrary the price of Brent Crude dipped below the $70/bbl mark. What went wrong?

Too many exemptions

The US has granted exemptions to 8 countries from the ban on oil imports from Iran. These include India, China, Japan and Korea. The first 3 Asian giants consume 1.7 million bpd out of the 2.6 million that Iran exports. If Turkey and Greece are also added, the impact of sanctions is going to be minimal. Obviously, the Trump team was worried about loss of face after China, Russia and India openly refused to abide by the sanctions. With China already throwing its weight around in the South China Sea and ignoring the impact of US trade war, the US did not have too many choices. This plethora of exemptions will ensure that the Iranian sanctions are ineffective. 

Practical problems for the US

Most countries affected by the sanctions have placed large arms orders with the US. Trump was not keen to lose out on the good will. Secondly, the US was also skeptical that Russia would purchase oil from Iran and sell as its own oil. Russia has been a long term ally of Iran. With published output of nearly 12 million bpd, Russia could easily absorb another 2 million bpd from Iran and increase its own exports. Thirdly, Iran had already started negotiations with private oil dealers to directly sell the oil to them so as to circumvent the US sanctions. Such funds had been used in the past to fund instability in the region as Iran has been doing through the Hezbollah in Lebanon and the Houthis in Yemen. Above all, Trump was worried that the Iran sanctions should not mark the Suez Canal moment for the US. In the 1950s, UK lost hegemony after the US spoke up against the blockade. Trump will not been keen on history repeating! 

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