The risk of further rupee weakness in the context of a euroquake causes GREED & fear to reduce the overweight in India in the Asia Pacific ex-Japan relative-return portfolio by two percentage points by increasing the weighting in China to an overweight.
The bad news is a lack of action so far in what is probably the biggest infrastructure issue in India right now. That is the lack of progress on
energy. Thus, as one speaker told Forum attendees this week, energy consumption is growing at a rate of 6-7% annualised whereas domestic sources of energy are growing at a rate of only 2.5-3%, resulting in a continued reliance on imported energy.
The main explanation for this deficiency is the lack of the necessary incentives for private capital given that the cost of coal and natural gas within India is still about half world prices. The power issue is, therefore, a growing constraint on growth. GREED & fear assumes, as is
traditionally the case in India, that the more media noise generated on this issue the more likely action will be forthcoming. Still for now it is not really possible to point to dramatic concrete action taken. Indeed the most effective GREED & fear has been made aware of this
week has again been an initiative by the RBI, which in September told the banking sector to stop lending to loss-making state electricity boards (SEBs) unless they raised tariffs. The purpose of this move is to put pressure on the state governments either to provide more
funding for the SEBs out of their own budget – remember India is a federal system – or to raise prices.
If the above are the issues, they are also largely reflected in the stock market. Consumption stocks have performed dramatically better than the likes of bank stocks or infrastructure plays during the course of the 20-month-long monetary tightening cycle. Thus, the BSE Consumer
Durables Index and the BSE FMCG Index have risen by 46% and 48% respectively since the end of March 2010 following the first interest rate hike, while the BSE Bankex Index and the CNX Infrastructure Index are down 2% and 27% over the same period. This reflects both the buoyant rural economy, courtesy of rising income growth, as well as the weakness in investment and related concerns about NPL risk in the infrastructure lending area, most particularly again in the energy sector.
The investment-driven infrastructure story will kick in again, with the only question when. For this remains one of the world's best growth stories on a 20-30 year view. It is so good precisely because India spent so little on infrastructure in the 50 years following independence with infrastructure spending running at only 3% of GDP in 1990 compared with the average of 7% of GDP since 2007.
The other point about India is that the stubborn inflationary pressures entrenched in the past two years are fundamentally a function of growth, and especially income growth. That sellers of consumer goods at the mass market level have the power to raise prices reflects the ability to pay for these goods. Thus, GREED & fear heard this week that the cost of infant food is rising by around 30% a year, which helps explain the share price chart of Nestle of India.
This is the opposite of the trend seen in the Western world when pricing power is only really enjoyed by people selling goods to the rich, or increasingly the very rich.
CLSA's Mumbai office forecasts that gross NPLs of the Indian banking sector will rise from 2.5% of total loans at the end of FY11 to 3.9% at the end of FY14.
However, in the recent cycle there is a significant divergence in the growth of NPL provisions between state-owned banks and private banks. On the same related theme, it is interesting to note that for the first time ever HDFC Bank overtook State Bank of India on Tuesday as the largest bank in India in terms of market capitalisation. Thus, the market capitalisation of HDFC Bank was Rs1.105tn on Tuesday,
compared with SBI's Rs1.098tn. Meanwhile, the market share of public sector banks has fallen significantly over the past two decades, declining from 92% in FY89 to a still large 74% in FY11. This is why the growth story for private sector banks remains compelling.
This is the reason why a weighting in Indian bank is maintained in the long-only Asia ex-Japan portfolio as it has been since the inception of the portfolio at the end of 3Q02. On this point, Indian banks have outperformed both the MSCI India Index and the MSCI AC Asia-Pacific ex-Japan regional benchmark index by a significant amount during this period. Thus, the BSE Bankex Index has risen by 721% in US dollar terms since the end of 3Q02, while the MSCI India Index and the MSCI AC Asia Pacific ex-Japan Index are up 381% and 175% respectively over the same period.
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