I am sure you have had enough bearish calls.
I also know that it is completely in vogue to be bearish on the Rupee and Nifty.Its also clear that Rupee is badly oversold.
The reasons for Rupee's performance and Nifty's decline have been analysed to death.Even a "paanwaala" now knows India's CAD is unsustainable.
So what am I trying to do here? Why add to the already overcrowded bears' county?
I think floating currency rate is a measure of relative confidence. And confidence cannot be overvalued or undervalued but surely can be either built or undermined. Confidence will be reflected by whether capital wants to come and reside in a country or not.
In this world of hyper-volatility, with trillions of dollars floating around it is impossible to mathematically calculate capital flows in or out of a given country.
So this is an attempt to read the market signals and them come to a numerical conclusion for Nifty and Rupee.
This is NOT an attempt to justify any levels for the Nifty or Rupee....its just an attempt to read markets.So no fundamentals here.
At the outset let me warn you, I am a horrible chart reader.Surely not a technical analyst of any kind. I may get this horribly horribly wrong.
I am just trying a different perspective and please take it that way.
So here we go.....
Have a look at the two charts below...
First one is the Nifty....Second is the Nifty in Dollars.....(Src :Bloomberg)
As can be seen, both charts have broken down from very long term triangle formations. If I understand it right, such breakouts, on the up or down side, are likely to lead to fast big moves in the direction of the breakout. In this case it happens to be downside.
The Dollar Nifty is around 78 right now and if charts are any indication,and of course if I can read them right, then it looks like headed towards the 50-60 range. Lets take average of 55. That would mean a cut of around 30% cut. But remember its the Dollar Nifty.
On the Nifty, having broken the lower trendline, if it sustains below it, then next significant support seems to be around 4500. So maybe a cut of around 15%.
That would leave Rupee to fall around 15% to get the Dollar Nifty to 55.
Put two and two together....and you get the title!!
Some of the other technicals that I tried my hand at went horribly wrong. So feel free to neglect this one.....LOL!!!
Volatility is making the biggest and best investors and analysts, think and rethink.
Rules and correlations,which would have been blindly adhered to are being shred to pieces by the markets. But as investors and market participants,all of us try to keep our thinking cap on to seek "alpha" as they call it.
What I am writing today is just a continuation from November 2011 linked below.
Manufacturing Opportunity
- Chinese Yuan which was around 7.5 to INR then, is now above 10. At the same time, Chinese wages are now growing fast as the working population of China peaks,a side effect of the one child policy that has been followed for decades.
Simmering discontent on the environment quality amongst the masses is making the Chinese Govt anxious. Just as examples of the havoc that the unfettered industrial growth has caused, the average life expectancy in North China has gone down by 5.5 years over the last 2 decades. Its almost a compulsion to have gas masks on,when moving around in Beijing. China is also not exactly "water rich".
Cleaning up would require lot of money and I would assume shutting down few capacities as well.
- Indian situation has worsened from what was discussed in article above. Consumption continued with no corresponding action to get things made within the country. Manufacturing reflected by IIP has been stagnant for two years now.Naturally CAD situation has worsened and USDINR movement is for all to see.
Moreover if what is understood of the Land Acquisition bill is correct then acquiring land for industrial expansion is hardly going to be a cakewalk.
The case for existing manufacturing assets to become far more profitable is getting stronger.Rupee depreciation, hopefully reduced Chinese competition and increased Chinese costs should act as tailwinds. Land acquisition problems may act as entry barriers.
Its been almost two years since that article in November 2011 and all the bearish calls on consumption have not turned out as I thought they would.While its negative side effects are causing distress, consumption itself has not collapsed yet.On the other side, manufacturing companies have not exactly set things on fire.
But given the way things are shaping up I would still bet that these "old sector" manufacturing assets are going to reap a lot of money and valuations are unlikely to remain at the pathetic levels that they are available at today.
While for the last 3-4 years "asset light" branded distribution companies have been investors' delight, I think "Asset Kings" are set to outperform them over the next few years!!
(Standard Disclaimer : The probability of my opinions going horribly wrong is closer to 1 than zero!!)
