Meltdown Coming??!!
Source : Bloomberg
Source : Bloomberg
Wednesday, November 23, 2011
Indian Consumption Story = FICTION??
In one of my previous articles I have already mentioned why I think the stocks related to consumption in India need to be sold or shorted. In this short note, I will just put a small number work to try and corroborate my point.
Have a look at the numbers below and notice the serious jumps in the sales volumes of most categories.Growth trajectory changed for quite a few of them.But all of that was accompanied by the ballooning fiscal deficit. Or should I say, it was a result of the ballooning fiscal deficit.
Now that the fiscal position of the government is totally messed up, it will probably also mean a serious brake on the growth rates.
(I have not still forfeited my right to be wrong!!)
I call it the "Fiscally Induced Consumption Tale In Overpopulated Nation" which can be abbreviated to "FICTION"!!!!
Tuesday, November 15, 2011
Crisis = Opportunity
We ended the last article on the cautious note of every crisis being an opportunity. So I thought maybe starting with the same theme is a nice way to move forward.
As the headline suggests, I will need to define the crisis as well as the opportunity.
I have pretty much given the contours of what I think is a crisis in a few of my previous articles. I will spend some time on finishing my argument on that and then try and convince what I think could be the opportunity arising out of the same crisis.
Putting my views in short, I think inflation is likely to remain high as long as we keep trying to grow beyond our means. That would essentially mean sustained high interest rates.Deficits of all kinds will exert their own pressure on various economic parameters.
Given the current global scenario, INR depreciation against the USD and CNY is very likely.In fact the crisis should take the form of rupee depreciation.
Thus I think the opportunity exists for sectors which are in a position to take advantage of a depreciating currency. The most obvious candidate that comes to mind immediately is IT sector.But their heavy dependence to the global financial sector is a dampener.
I think the sector which has the potential to make a killing is "manufacturing".
China has been the biggest problem for all manufacturing setups anywhere in the world. It has now become the biggest manufacturer of the world overtaking USA. Years of cheap credit, labour and government subsidies in various forms (including currency) has meant that manufacturers elsewhere have struggled to compete against Chinese competition, for whom cost of capital is probably an alien concept. Lot of businesses have built models around Chinese outsourcing.
But it looks like things are changing.
- Currency - CNY has started to appreciate. The movement against the USD may not be huge, but the movement against the INR is very meaningful. After having traded on an average of 5.5 to the CNY, INR is now trading at above 7.5. That means a depreciation of above 35% against the CNY in the last 3 years.That should take care of a lot of Indian inefficiencies like infrastructure and labour productivity.
- Wage Inflation - As I have discussed in one of the previous articles, China is ageing fast and wage inflation is likely to be more of a structural phenomenon.
- Given that we tend to consume much more than what we can produce, deficits flare up and currency is always vulnerable. To balance this situation out, either we start consuming lesser or start producing much more. So manufacturing is the way out of an imminent crisis.
Manufacturing in India is not an easy business. Government policies have ensured that labor,land and capital as well has become difficult to get and whenever you get them, they are expensive.All this has already and will in future continue to take a toll on the competitiveness of Indian manufacturing.
Currency depreciation, which markets have forced upon us, will act to counterbalance these inefficiencies. It will make exports more viable across the board. Businesses in India which have been built based upon Chinese outsourcing, will find it increasingly expensive to import and sell. That should mean they would turn to Indian manufacturers at some point in time or put some some units themselves.
Given the difficulties in putting up manufacturing capacities in India from land acquisition to clearances, it will not be surprising to see existing manufacturers enjoy some real pricing power.For the past few years, companies built upon the outsourcing model have been highly valued by investors.
If the above theory is correct, things could change over the next few years.I dont have any individual recommendations to make but I think its not a bad idea to at least do some ground work.
Things can change if the view on currency changes because of collapse of crude oil prices or something similar.But we will take that up whenever it happens.
No country in history has made it big without manufacturing. UK, US or China. As of now, that theory holds unless India proves otherwise and consumes its way to glory!!
We ended the last article on the cautious note of every crisis being an opportunity. So I thought maybe starting with the same theme is a nice way to move forward.
As the headline suggests, I will need to define the crisis as well as the opportunity.
I have pretty much given the contours of what I think is a crisis in a few of my previous articles. I will spend some time on finishing my argument on that and then try and convince what I think could be the opportunity arising out of the same crisis.
Putting my views in short, I think inflation is likely to remain high as long as we keep trying to grow beyond our means. That would essentially mean sustained high interest rates.Deficits of all kinds will exert their own pressure on various economic parameters.
Given the current global scenario, INR depreciation against the USD and CNY is very likely.In fact the crisis should take the form of rupee depreciation.
Thus I think the opportunity exists for sectors which are in a position to take advantage of a depreciating currency. The most obvious candidate that comes to mind immediately is IT sector.But their heavy dependence to the global financial sector is a dampener.
I think the sector which has the potential to make a killing is "manufacturing".
China has been the biggest problem for all manufacturing setups anywhere in the world. It has now become the biggest manufacturer of the world overtaking USA. Years of cheap credit, labour and government subsidies in various forms (including currency) has meant that manufacturers elsewhere have struggled to compete against Chinese competition, for whom cost of capital is probably an alien concept. Lot of businesses have built models around Chinese outsourcing.
But it looks like things are changing.
- Currency - CNY has started to appreciate. The movement against the USD may not be huge, but the movement against the INR is very meaningful. After having traded on an average of 5.5 to the CNY, INR is now trading at above 7.5. That means a depreciation of above 35% against the CNY in the last 3 years.That should take care of a lot of Indian inefficiencies like infrastructure and labour productivity.
- Wage Inflation - As I have discussed in one of the previous articles, China is ageing fast and wage inflation is likely to be more of a structural phenomenon.
- Given that we tend to consume much more than what we can produce, deficits flare up and currency is always vulnerable. To balance this situation out, either we start consuming lesser or start producing much more. So manufacturing is the way out of an imminent crisis.
Manufacturing in India is not an easy business. Government policies have ensured that labor,land and capital as well has become difficult to get and whenever you get them, they are expensive.All this has already and will in future continue to take a toll on the competitiveness of Indian manufacturing.
Currency depreciation, which markets have forced upon us, will act to counterbalance these inefficiencies. It will make exports more viable across the board. Businesses in India which have been built based upon Chinese outsourcing, will find it increasingly expensive to import and sell. That should mean they would turn to Indian manufacturers at some point in time or put some some units themselves.
Given the difficulties in putting up manufacturing capacities in India from land acquisition to clearances, it will not be surprising to see existing manufacturers enjoy some real pricing power.For the past few years, companies built upon the outsourcing model have been highly valued by investors.
If the above theory is correct, things could change over the next few years.I dont have any individual recommendations to make but I think its not a bad idea to at least do some ground work.
Things can change if the view on currency changes because of collapse of crude oil prices or something similar.But we will take that up whenever it happens.
No country in history has made it big without manufacturing. UK, US or China. As of now, that theory holds unless India proves otherwise and consumes its way to glory!!
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