Friday, June 5, 2015

In search of opportunities


"It is only by not paying one's bills that one can hope to live in the memory of the commercial classes."
-          Oscar Wilde (Irish, 1854-1900)
Word for the day
Middling (adj)
Mediocre; ordinary; commonplace; pedestrian.
(Source: Dictionary.com)
Malice towards none
Corruption of mind, ideas and preferences is equally detrimental to the progress of a society as the corruption in money and material matters.
First random thought this morning
Till Tuesday morning the financial experts were almost unanimous on the likely rate cut by RBI. Governor Rajan did not surprise the markets.
However, a couple of days after the policy announcement the street is vertically divided on the future course of action. Forecasts now vary from 75bps cut to no cut.
The governor has certainly brought back the element of surprise in the policy making. This un-does whatever Governor Rajan has sought to do since he took over the mantle at RBI.

In search of opportunities


OECD recently cut its global growth forecast for 2015 from 3.7% to 3.1%. To put this in perspective, the global economy grew at 3.9% CAGR in the decade through 2011. In 2014 global economy grew 3.3%.

OECD said that unlike past instances where the economic recoveries were aided by investment in manufacturing capacities and technology, this time it is not happening. Besides, lack of demand is holding back employment, wages and consumption.

US and China have been two big engines of global growth in past decades. Both these engines running out of steam. The OECD sees the U.S. economy expanding 2% this year, down from 2.4% in 2014. China is expected to grow 6.8% this year, down from 7.4%.

At first this trend might look ominous for Indian economy and markets. But a second look exposes underlying opportunities. For example, consider the following:

(a)        The immediate fear of financial investors worldwide is the reversal of rate cycle in US. Slower growth and persistent deflationary pressures may delay the eventual "lift", providing a much needed window of relief to Indian economy. This may be particularly critical if the monsoon indeed turns out be bad and financial stress in the economy rises.

(b)        Lack of investment demand in developed countries and China may augment availability of capital for starved Indian projects.

(c)        Persistent deflationary pressures may keep commodity prices lower, to the benefit of importing economies like India.

(d)        Lack of demand may render a lot of global manufacturing capacities and capital equipment redundant. Given the rock bottom freight rates, Indian miners, construction contractors, and manufacturers may sources these capacities and equipment at much cheaper rates.

            This may be a threat to the "Make in India" plan and domestic capital equipment manufacturing industry, but still a big opportunity for the overall economy.

(e)        Slower growth resulting in lower income, lower subsidies and higher fiscal deficit may strengthen the demand for cheaper services, medicine, clothes, vacations etc. Thus benefitting economies like India, Bangladesh, Sri Lanka etc. Though some engineering exports may suffer.

            Though some slowdown in demand is naturally expected, I would not be unduly worried about severe impact on Indian IT and pharma companies.

In view of this, I am more confident about my underweight on commodities and cyclical capital goods manufacturers. I would be inclined to look at large contractors who are in a position to compete with global construction companies, import/lease equipment's and capacities from overseas markets and sustain their hare in incremental business.

I am evaluating whether any change is needed in overweight consumers in light of likely deficient monsoon and Nestle controversy.

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