Depreciating Rupee Can TROUBLE MARKETS..

When most of the global markets are near or below their October lows, Nifty stands almost 20% above the same, despite any support from the macroeconomic side (Falling IIP, Rising Deficits, ... etc.). This I believe is mainly because over the last few months the Indian Rupee was one of the best performing currency among the other emerging market currencies (When compared to USD) and thus reducing the currency risk faced by the foreign investors.

The global fund managers while investing in any foreign country's equity (or bonds, etc) assign a high weight to the currency risk they face while investing. Investment in the country with stable currency commands lower risk premium against investment in country with volatile (weakening currency).

This is because a depreciating currency erodes the value of investment made. For example, If a FII invested $1000 in Indian markets when USDINR exchange rate was 40, he was able to invest Rs 40,000. After a year lets assume that their is no change in the value of investment (still Rs 40000) however the rupee has depreciated and the current USDINR exchange rate is 50 and he wants to take his dollars back. He would only get back $800 and thus given the value of the asset class he invested remaining the same he looses 20% because of a decline in the value of Indian currency.

What is happening over the last few months is that the Indian rupee is facing a stiff resistance at the 50 mark (and less volatile as its trading in the range of 48-50) because of the RBI intervention and since other emerging market currencies are depreciating, the flow of foreign funds is stable in India compared to other markets. Hence the Indian equity markets have outperformed others.

However today rupee has broken its strong resistance/physiological level of 50 and is currently trading around 50.30 and the downside risk & expected volatility is much higher now. (The technical analysts say that the next resistance is around 52-53 mark).

So I believe that because of this higher currency risk faced by the foreign investors (along with the fears of rising deficits, outlook downgrade by S&P, etc) a higher risk premium could be attached to India. Moreover as India is primarily an importing country this fall in the value of currency will also increase the trade deficits and hence the overall deficit.

Thus a falling rupee could lead to a fall in equity markets.

IS GOLD D NEXT BUBBLE....?

Since October 24th 2008 GOLD has rallied some good 300 plus dollars (more than 40%) and every second person in the market is expecting gold to reach the level of $1200, and some even the euphemistic levels of $1500 and so on...

The so called "COMMODITY EXPERTS" come on TV and give their short/long term target for Gold, the same way they gave the target for Crude Oil when it was $140 (targets were of $200 by December and so on...). It also reminds me of target levels for SENSEX in last year January which they expected to be 30,000 by year end and so on...

However what exactly is the fate of those euphemistic targets is any ones guess. There are fundamental reasons that have lead to a rise in the gold prices but what has started recently is that people have started speculating huge by taking the fundamentals as base and I believe that when this happens the rise in the price of an asset class reaches its peak or like a BUBBLE.

The crisis is looming the European countries and it is expected that Germany will bailout some of the EU member countries. Germany holds the second largest gold reserves in its vault and there is a big buzz on the streets that it would sell some of it at an attractive price (~$1000 levels). Thus this should also bring the downward pressure on the prices. Moreover for people who invested in gold considering it as a safe heaven in the last few months , makes much sense to book the profits. The inflation against which GOLD is regarded as a best hedge is an extinct race for the time being. The dollar is gaining its strength against EURO (given the steps taken by the Obama government)

So I strongly believe that the upside potential for GOLD prices is limited and there exists a strong resistance level at around $1040. Lastly the biggest reason for the crash for US housing bubble, or the Crude bubble or any stock market bubble is the realization that "HOUSING/CRUDE/STOCK prices are something that is going to rise forever" and once this realization sets in (AS HAPPENING IN GOLD) one can believe that the bubble is at its peak and the fall is inevitable (If we can trust HISTORY).

Bailing Out Financials Or Manufacturing...?

India's Index of Industrial Production, or IIP, fell by 2% in December 2008, due to a significant fall in the growth of manufacturing, consumable durables and intermediate goods. The factories are getting closed and thousands of workers are laid off. In US and UK too the industrial production fell in the last three months by 3.6% and 4.4% respectively. The situation is much worse in the countries more dependent on manufacturing sector exports. The Economist points out that "Industrial production is volatile, but the world has not seen a contraction like this since the first oil shock in the 1970s—and even that was not so widespread"

Thus when the US and European system is busy in bailing out the banking and the financial system, the manufacturing sector is still sinking. This problem can further worsen the macroeconomic crisis since the manufacturing sector is the one that provides a major chunk of employment and thus hundred and thousands of job losses in the manufacturing sector can lead to a reduction in the service sector spending by the workers and thus initiating a downward spiral.

However the reason why manufacturing sector is sulking is because of lack of demand. Thus a direct aid to the sector does not solve the problem and only a tax benefit for the consumers if they consume the sector's product (or something of that sort) can actually provide any material benefit for the sector. Something like cutting the service tax from 12-10% (just announced by India's fin min)

Hence, I strongly believe that the global policy makers should start providing material aid to the ailing manufacturing sector and for the time being remove their attention from the BANKING if they really want to save their economies.

IT margins SHOULD decline...

For the quarter ended December 2008, the Indian IT sector has been one of the better sectors in terms of reported operating margins, among the top companies Infosys has beaten the street expectations and the likes of Wipro and TCS have done reasonably well. (Thank fully SATYAM is no longer a big IT company).

The guys on TV say that this is primarily because of a weakening rupee, and a good performance at operational level. Then the management comes and provides a fairy tale type decent guidance for the coming quarter/fiscal and the IT stocks start rallying.

Then someone comes the other day and says that Mr. OBAMA is against outsourcing; hence troubles for Indian IT companies and I just read in papers today that people in rural areas in US are developing it as an IT sourcing hub in order to generate employment. (So one more competitor for Indian IT companies).

However I cant understand one simple business logic, that if my clients are making huge losses , how can I continue showing great margins despite being a public company where my customers can see my margins. Margins in Indian IT industry are as high as 30% at the operating level and when the customers can see the accounts of the public companies then why are they not asking for price cuts so as to reduce there own personal losses

I strongly believe that this era of higher margins by Indian IT companies should come to an end if their customers (likes of Citigroup, Merrill, etc) have simple business sense and start asking for lower prices for the services provided to them by the Indian IT majors.

Budget Disappoints or Europe Tumbles.. The real Truth...?

Over the last 2 days the Indian markets have fallen by around 7% after rallying the whole of the last week. The reason as they say on CNBC is that the interim budget has disappointed, the fear of a global recession strengthens and a weakening Euro.

But are these reasons new...? Something which was absolutely unexpected and came as a big negative surprise for the markets and they tumbled...? The answer will be a big NO.

The budget disappointed because the expectations were unjustified and anyone with basic knowledge of macro economics would have said that budget will disappoint as the government does not have enough funds to disperse more stimulus. I had already mentioned the same in my earlier blog that the interim budget "Too Many expectations"

The crisis in Europe was also foreseen as the bond yield started to widen (check my earlier post) and the fear of global recession strengthening is just a lame excuse every time these anchors could not justify the fall in the markets.

I believe and will say again that the biggest threat is coming from European side. Yesterday the German finance minister became the first senior policy maker to broach the topic this week, saying some other 16 euro nations are “getting into difficulties” and may need help. French officials are also concerned about crisis as the cost of insuring Irish, Greek and Spanish debt against default rises to records and bond spreads widen. The bailout which is not a mandate as per the treaty, I believe will see the face as the mighty Germans and French can not leave the smaller countries default and hurt their common currency since the treaty says

that EU nations can grant financial assistance to a member state if a country is“threatened with severe difficulties” caused by “exceptional occurrences beyond its control"

Thus I would again say that the bigger threat is Europe and the events like budget or a GM/Ford needing more money to survive is a media gimmick to divert the mass attention from the grave crisis.

An Epitome of Lies: Unitech

A lot of people whom I know keep asking me that at is Unitech a good buy at Rs 30, can we buy and hold it for the long term and I always reply that if Rs 30 is of no value in your life, you better donate it to a charity rather than buying a stock like Unitech.

A few days back I was watching an interview of Unitech's promoters on CNBC in which they stated that we have not pledged any of our shares and we have good amount of cash with us and hence no liquidity issues. The market really got excited and the so called CNBC experts said that this is really a good news and the stock rallied over 12% in couple of days (India's risk free rate of interest for a year is just 6%).

Come today, a headline in the newspapers that Unitech's promoters have pledged around 49% of their equity (Out of 64.xx% they own). So the so called corporate governance and communicating truth to the shareholders takes a toss.

I strongly believe that despite the slowdown in the real estate sector the bigger reason these big reality stocks are falling is because of poor corporate goveranance and the way market punished Satyam, Unitech should also see the same fate.

Interim Budget 2009 - Too Many expectations...!!!

Within couple of hours Mr. Pranab Mukherjee is about to unveil interim budget for the year 2009 and he may show India's biggest budget deficit since last 18 years. The bloomberg street expectations show that the shortfall may widen to 6.5% of GDP as against the targeted 2.5%. The government says that the spending to revive the economy (or to win the upcoming elections) is more important than the budget deficit and this may prompt the credit rating agencies to re asses their credit ratings assigned to India.

The biggest problem is that the street is expecting a little too much from the government as if it has some Pandora's box which can release unrealistic amount of money. This expectation is the only reason that throughout the last week Indian markets have outperformed the global and I strongly believe that when the real picture is showcased it is likely to be below expectations and will intimate fresh selling in the equity markets.

Seeing the railway budget on Friday which was below the street expectations, I believe the common budget will also see the same fate and the government can not provide too much benefits in the fiscal side and increase its deficits.

Moreover if at all there will be any benefits for any sectors it will be for the export intensive sectors (textile, jewellery) because they are loosing millions of jobs every month and subsequently millions of vote banks for the next elections.

Thus the best strategy would be to cover the longs, stop expecting and wait for some time to see Mr. Mukherjee live on CNBC/DD and see whether economics dominates or greed for votes supercedes.