Street's done falling, way’s up now

India’s “silent” Prime Minister has finally shown that he has a voice, unleashing a slew of reforms in multi-brand retail, aviation and broadcasting, among other things, though it’s a pity he needed a Washington Post to stir him out of his slumber and tell India-bashers that ‘Singh is King’ after all.

It’s another thing that an additional 375 sq ft of retail space will add only one new job in the retail sector, so to add 4 million new jobs over four years, an incremental 1.5 billion sq ft needs to be added over this period.

Simply put, the target requires 6,000 malls, the size of Mumbai’s famous 0.25 million sq ft Atria Mall, to be absorbed by India’s bigger metros and cities in four years.

That seems impossible to achieve when Mumbai, Greater Noida, Bengaluru and others are already reeling from the ignominy of empty malls and falling footfalls.

Again, almost 40% of India’s retail space is primarily non-food retail. Hence, all these tall claims about the entry of Wal-Mart and its ilk improving rural connectivity by improving back-end infrastructure are easier said than done.

Also, the display of bravado in North Block over the Rs5/ litre diesel hike is hardly cause for cheer as the under-recoveries of oil marketing companies for diesel alone still stand at a whopping Rs1 lakh crore, akin to 1% of gross domestic product (GDP).

Negative export and import growth numbers for July and August, in a row, are symptomatic of India’s own “growth cliff”.

What then explains the $3 billion-plus that FIIs pumped into Indian equities last month alone, pushing local bourses up 4%, outdoing in the process, most global and Asian indices?

Well, I am not the least surprised. The BSE-30 index ended last month just shy of 19000 and slightly lower than our own forecast of 19300 for September. There is certainly a strong sense of vindication, if not hubris, as I quote from our strategy piece dated June 5: “Since August 2011, the rupee has depreciated by more than 20% and since its recent high in February 2012, it has depreciated more than 15% against the greenback, clearly suggesting a rupee rebound is inevitable as it has been massively oversold”.

The rupee firming up by 4% in September has been the biggest tailwind for the market and the best is yet to come. The reduction in withholding tax from 20% to 5% for long-term borrowings and infra bonds is, to my mind, the only material big-ticket “reform” in the last few weeks, less for its quantum of reduction and more for the sheer positive intent about the government’s agenda, going forward. We said it in June this year and we are saying it now that with or without reforms, the Sensex should touch 22000 by March 2013. We stick to our house view that the current account deficit for FY13 will come in at less than 3%, driven by a big-ticket announcement on the lines of, say, a Resurgent India Bond or India Millennium Deposits, which should easily rope in $15-20 billion.

I quote from my own June 5 piece: “Assuming the RBI borrows at 200 bps above Libor (London interbank offered rate), it would still be able to rope in dollars at a price that is lower than the going rate of 8%-plus on a 10-year government bond locally”.

The falling forward premia on the rupee-dollar trade of late, the ferocity with which exporters are hedging their receivables and importers are choosing to do exactly the opposite on their short- to medium-term payables, clearly suggests that the party for rupee bulls is far from over. India naysayers have been calling for an oil shock on the back of QE3, with oil prices slated to shoot up 30% or more in the near term, exactly on the lines of QE1 and QE2.

Such doomsday proponents would do well to know that QE3 is different; this time, the Fed will be buying back not government bonds but mortgage backed securities, which is far less asset inflationary in its impact. Also, the global economy is still limping, what with China posting its 11th straight month of contraction in manufacturing purchasing manager’s index (PMI) in September, with a reading of sub-48. While it is hardly surprising that the euro zone is almost in a recession, the fact that Singapore, despite a current account surplus of 15% of GDP, is also heading into a recession, is bewildering. The global slack will absorb the ill effects of QE3 if any.

Back home, now that the rainfall deficit is barely 5-7% and the coming rabi crop is slated to be pretty good on the back of rising reservoir levels across the country, a 2.5% agricultural growth is a foregone conclusion in FY13.

Overall, GDP growth fell to 5.5% in the fist quarter of this fiscal, led by services GDP, which fell to 6.9%, in turn led by a measly 4% growth in trade, hotels, transport and communication. Assuming a realistic rebound to 7% growth in the trade & hotels’ segment alone in the second quarter, services GDP should come in at 8%-plus, in turn driving the September quarterly GDP growth to 6.5%.

That will set the tone for the next phase of the rally.
Do note that we are sticking to our 8.5% services GDP growth number for this fiscal, which is in any case very conservative, as services GDP has averaged nothing less than 9.5% for the last 10 years. We expect manufacturing too to rebound from a measly 2.8% in the last fiscal to roughly 5% in the current one, helped partly by the base effect and largely by “pump priming” by the government, which is borne out by the 22% sequential jump in government spending in the first quarter of this fiscal.

To sum up, a 7% GDP growth is still within the realm of reality and the pockets of surprises which will drive this will come from areas like construction, finance and insurance.

The Chindia comparison is relatively passé. For all those FIIs who are still overweight on Brazil, my simple take is this: it is better to invest in India with a GDP growth of about 6.5-7% and core inflation (ex food & energy) at roughly 5% than investing in Brazil with GDP growth of less than 3% and inflation at 5%-plus. The Short Brazil and Long India trade should play itself out in the year ahead.

Any minor fall in bond yields to sub-8% levels on the back of a 65% completion already in the Indian government’s borrowing calendar will be the added icing on the cake, what with CD rates already showing the way, down to barely 9% levels from 11% plus, in barely six months!

As for all bets being off if Spain and Greece are ejected out of the European Monetary Union, all I will say is, that will be a classic case of “cutting the nose to spite the face”. And Angela Merkel can ill afford to either cut her nose or spite her face because the last thing she would want now is German GDP getting shaved off by 25%, which is what will happen, if any of Germany’s poorer cousins find themselves “out”.

Verma is MD & CEO, Violet Arch Securities Pvt Ltd