Tuesday, August 20, 2013


The Indian Rupee  has continued it slide versus the USD.
The INR is down almost 19% vs the USD since the beginning of May 2013!

Inaction and lack of reforms by the government have continued to compound problems of food inflation and currency depreciation.

At the present time, local investors are faced with volatile and mostly negative returns in both the equity markets and also the Indian Debt market, which has been severely rattled by sharply rising Government bond yields.

The only asset class that has managed to outperform and provide a hedge to local investors is GOLD.(thanks to a currency depreciation)


Indian Rupee Collapses - Worst Day In 20 Years | Zero Hedge

The Indian Govenment has been steadily raising import duty on gold, in its continuing effort to rein in the current account deficit.

Watch this space. 
As valuations in the Indian Equity markets start to look attractive, remember that the country now faces a rather tricky situation of slowing growth, steady/persistant inflation, and a weak currency.

GDP growth rates of under 5% are now a distinct possibility.

While a sub 5% growth rate may appear robust to readers in the developed world----in emerging markets like India, it is extremely worrying.

Unemployment and non performing bank loans will be  serious problems over the next few years, if we are unable to get the economy back on track.

The inability of the RBI to cut interest rates (due to a rapidly depreciating currency and a rising current account deficit) will add to the woes of a struggling manufacturing sector. Stock prices of companies in the engineering / capital goods space are now trading at 8 year lows, and hopes of a recovery look bleak at the moment.

The Banking sector too has faced a drastic sell off in stock prices since May 2013. Public Sector banks will face considerable stress and even at todays discounted valuations, they still remain a high risk buy- meant only for those who are ready to weather more turmoil in the sector.

Perhaps, private sector bank stocks need to correct too, as expectations of growth are adjusted downward. Many private sector banks trade at expensive price/book ratios even after the initial sell off

Lastly, FMCG (Consumer staples), Pharmacaeuticals, and Information Technology (IT Services) remain the last pillars of strength.
Buying in these sectors should be done with extreme caution, as valuations may not leave an adequate margin of safety for the investor. 

These sectors will continue to relatively outperform the benchmark indices, as they function with nominal government price controls (FMCG) and in the case of export oriented Pharmacaeuticals and IT companies - are beneficiaries of currency depreciation.

No comments: