25 August 2013

Too much CAD pain Downgrading India and upgrading China to neutral:: JPMorgan

 Our asset allocation calls were OW Mexico, Colombia, India, Taiwan,
Thailand, the Philippines and Malaysia and UW Brazil, South Africa,
China and Indonesia. The recommendation in Indonesia is a zero weight
as the risk reward between a lower Rupiah against higher equities is so
poor. We are addressing the inconsistency in recommendations in an
environment of balance of payment strains by downgrading India to
neutral and upgrading China to neutral. We acknowledge this is reactive
rather than proactive. If the Rupee continues to slide then India will
continue to underperform.
 Currencies are driving equity markets. The Rupee and Rupiah are
leading EM FX lower. Investors are asking who will fund their current
account deficits (India CADest 5.1%/GDP and Indonesia CADest
2.1%/GDP). Markets pricing in tapering since May is a key catalyst. Our
base case is the Fed tapers asset purchases from September. A
continuation in EM bond fund redemptions is a reasonable assumption
thus the strain on EM FX is likely to continue.
 Are we too late? We are certainly late in downgrading India. Our OW
case was less fiscal drag and a monetary stimulus leading to a modest
cyclical acceleration in 2H13. The move in the Rupee has overwhelmed
this. Policy options are limited. They have announced reform plus
technical measures to support the currency. These have not worked. The
IMF would typically prescribe higher interest rates to suppress domestic
demand and lower imports in order to address the current account deficit.
This option is politically unpalatable with next year’s general election.
Arguably, more importantly the equity flows are important in funding the
CAD. Higher interest rates and lower growth would likely result in
foreign selling. A possible option is to completely open India's bond
markets. This would have two positive impacts: inflows from passive
funds into Indian bonds and a signal of economic liberalization. If this
stabilizes the Rupee then Indian equities are likely to rally, led by the
banks which are cheap relative to their valuation history.
 Will this FX stress expand to other EMs? With Indonesia difficult to
short hedges are migrating to other ASEAN markets, notably Thailand.
The late June to date cyclical rally is losing steam. EM equities are likely
to decline into September. Despite a 3.5% CAD the Colombian Peso is
outperforming other EM currencies. This reflects confidence in its ability
to fund its deficit via FDI. We will publish more details on asset
allocation views in this month’s Key Trades and Risks.

FOMC Minutes: “Almost All” Favored Contingent Tapering Plan:: Credit Suisse

While the timing of tapering is still an open question, nothing in the minutes warrants our changing our
longstanding call for a modest cutback in the pace of monthly asset purchases on September 18, possibly
by $20bn to $65bn per month.
In late July, there was a wide array of views among the 19 FOMC participants on the economic outlook,
inflation prospects, and the reasons interest rates rose since June. But, importantly, the July 30-31 FOMC
minutes noted:
“…almost all participants confirmed that they were broadly comfortable with the characterization of
the contingent outlook for asset purchases that was presented in the June postmeeting press
conference and in the July monetary policy testimony.”
(Note that “participants” are all 19 officials on the FOMC. “Members” would be only the 12 voting members
on the Committee this year.)
This contingent outlook was the following: “…if economic conditions improved broadly as expected, the
Committee would moderate the pace of its securities purchases later this year. And if economic conditions
continued to develop broadly as anticipated, the Committee would reduce the pace of purchases in
measured steps and conclude the purchase program around the middle of 2014. At that point, if the
economy evolved along the lines anticipated, the recovery would have gained further momentum,
unemployment would be in the vicinity of 7 percent, and inflation would be moving toward the Committee's
2 percent objective.”
There were a “few” participants who, while comfortable with the plan in general, “stressed the need to avoid
putting too much emphasis on the 7 percent value for the unemployment rate, which they saw only as
illustrative of conditions that could obtain at the time when the asset purchases are completed.”
Since July 31, to the extent they have revealed their preferences and expectations, Fed speakers have
generally left the door open for a taper announcement at the September 17-18 FOMC meeting (which is
still our forecast). St. Louis Fed President Bullard, a voter this year, appears to be an exception; he doesn’t
seem confident that the economy is “improving in the way we need.”
If they were so “comfortable,” why not put it in writing?
Recall that the July 31 policy statement said nothing about this contingent tapering plan. The debate about
this was among most, many, and a few of the 19 participants:
“Most participants saw the provision of such information, which would reaffirm the contingent outlook
presented following the June meeting, as potentially useful; however, many also saw possible difficulties,
such as the challenge of conveying the desired information succinctly and with adequate nuance…A few
participants saw other forms of communication as better suited for this purpose.”
But in the end, what really mattered is what the 12 voting “members” of the Committee thought:
“The Committee also considered whether to add more information concerning the contingent outlook for
asset purchases to the policy statement, but judged that doing so might prompt an unwarranted shift in
market expectations regarding asset purchases.“
Forward guidance discussion further highlights the challenges of transparency
“In general, there was support for maintaining the current numerical thresholds in the forward guidance. A
few participants expressed concern that a decision to lower the unemployment threshold could
potentially… [call] into question the credibility of the thresholds and undermining their effectiveness.

ICICI Prudential Top 100: Invest :: Business Line


Technicals- Cairn, GTL Infrastructure, Sterlite Industries, Reliance Infrastructure, Arvind, Crisil :: Business Line

 

Technicals- Reliance Industries, Infosys, SBI, Tata Steel :: Business Line


Beware of I’s India and Indonesia bonds continue to face headwinds HSBC

Beware of I’s
India and Indonesia bonds continue to face headwinds
Heightened FX volatility and wider current account deficit
make India and Indonesia bonds most vulnerable in Asia
Indian bond markets remain vulnerable to tight liquidity
conditions despite latest steps to stabilize long-term yields
Heavy bond supply and rising inflation are key risks for
Indonesia bonds

RBI Strategy On Short-Term Interest Rates:: nirmal bang

Introduces Measures To Soothe Hardening Yields
As expected, the Reserve Bank of India (RBI) announced measures to cool off money
market rates and permit the banks to spread their mark-to-market (MTM) losses on their
bonds portfolio. The measures were necessary to avoid higher spill-over to long-end
rates, which witnessed a sharp spike and posed a threat to credit flow towards
productive sectors. While the measures are dynamic in nature, we believe they would
be positive for the banks and markets, who were staring at huge treasury MTM losses in
2QFY14. Currently, we have not made any changes to our basic assumptions in respect
of the banks in our coverage universe and prefer to wait and watch as to how things
pan out in the near term.
RBI strategy
The recent RBI measures to harden short-term interest rates were effective and resulted in
addressing the volatility in the exchange rate. Going forward, with the onus on keeping money
market rates around the MSF (Marginal Standing Facility) rate of 10.25%, managing liquidity
for productive sectors and avoiding any abnormal hit on the banks’ bond portfolio, the RBI has
announced some more measures which are as follows:
 To conduct open market operations (OMOs) of long-dated government securities worth
Rs80bn on 23 August, 2013 and thereafter, as warranted.
 Banks are allowed to retain their SLR (Statutory Liquidity Ratio) holding in the HTM (Held
To Maturity) category at 24.5% of their NDTL (Net Demand And Time Liabilities) as against
the RBI’s earlier directive to bring down SLR investments in the HTM category gradually to
23.0%. Also, the banks would now be allowed to transfer SLR securities to the HTM
category from the AFS (Available For Sale)/HFT (Held For Trading) categories with a limit
of 24.5%, as a one-time measure, at lower of book value or market value. This is in addition
to the option of spreading the depreciation, arising out of MTM valuation of AFS/HFT
securities, over the remaining period of the current fiscal year in equal installments. As a
result of this, we expect the banks to transfer all their securities which had MTM losses to
the HTM category.
 Ever since bond yields started hardening, bank stocks were adversely impacted following
the MTM losses on their treasury book. With the latest RBI measures, bank stocks could
partially recover their losses.

Index Outlook: Bulls fight back valiantly :: Business Line


Asia Pacific Economics Rise in Real Rates – Why It Feels Like the 1990s :: Morgan Stanley Research

Asia Pacific Economics
Rise in Real Rates – Why It
Feels Like the 1990s
Speedier rise in US real rates and dollar pushing
Asia to lift its real rates: We have for some time been
highlighting the challenges that the rise in US real rates
and the appreciation of the US dollar will pose for Asia.
However, the pace at which US real rates have risen
and the appreciation of the US dollar against Asia and
EM currencies have clearly been a surprise to us. The
speedier rise in US real rates and dollar has now pushed
Asia to lift its real rates at a time when its GDP growth
has already been slowing. This pro-cyclical tightening, in
our view, is only increasing the headwinds to the
region’s growth.
Is the rise in real rates temporary? We believe that we
are at the beginning of the cycle of a rise in the US dollar
and rates, implying that the upward pressures on real
rates in Asia will likely remain as a trend. We believe the
key factors that will drive real rates in Asia will be trends
in the US dollar, real rates and trade balance.
In this context, we think the correct historical guide to
evaluate developments in the current cycle will be the
mid-1990s cycle – when US real rates moved up along
with a decline in its trade deficit amid an appreciating
dollar.
An environment of rising real rates and moderate
GDP growth will likely be less supportive for risk
assets. We believe that real rates would rise even as
AXJ GDP growth is moderating. In other words, we are
now entering into a different economic environment as
compared to the last 11 years, where real GDP growth
was maintained at high levels while real rates were low.

Adani Enterprises (Rs 165.2):BUY :: Business Line


Deutsche Bank Research: The Equity View August, 2013

 Equities are trading close to record highs in developed markets despite an underwhelming Q2 earnings season.
Multiples have rallied to mid cycle levels as markets discount an imminent earnings recovery.
 Recent macro data has given the market considerable empirical cover to anticipate an inflection in earnings
momentum, particularly given bottom up consensus expectations are now muted (+1% Europe/+6% US for CY13):
– ISM Manufacturing and Services data for August posted strong gains, including the new orders component.
– European PMIs confirmed the uptrend in flash figures, with the strongest gains from the periphery suggesting a
more balanced pattern of growth. Our long-standing non consensus view of a return to growth in Europe in Q2
was confirmed with a +0.3% print.
– In July, the UK composite PMI hit its highest level since 1998 and retail sales surged to a 7 year high
– Bearish views on China had become consensual. July trade data surprised positively and IP accelerated in July
to 9.7%, a 5 month high with electricity consumption in August up 10%.
– Only Japan came in light of forecasts with 2.6% GDP (annualised) vs consensus of 3.6%.
 Money flows continue to provide support to DM equities. AUM inflows have spread to Europe and are now positive
YTD in addition to the US and Japan. This is providing a positive tone to markets, particularly on pull-backs.
 After a slow start to 2013, global M&A activity has accelerated in Q2 and June –July were ahead of the 5 year
average. Global ECM activity (placings, IPOs) is up 42% at the H1 stage, highlighting levels of risk appetite.
 Conclusion: Despite concerns over rising treasury yields/taper risk and markets near to their highs, equities are well
supported at these levels through to YE on greater confidence of an inflection in earnings momentum, based on
more evidence of a broadly based recovery than had been anticipated, plus continued inflows to the asset class.
 The biggest risk to our view is a disorderly market response to the end of QE that sees bond yields rise or equities
fall in a manner that would impede growth. We expect intermittent volatility spikes around events such as German
elections/US debt ceiling discussions and would buy such pull-backs.

Good for high-risk investors :: Business Line

A five-year lock-in and high surrender charges during the initial years make it suitable only for those with a long-term horizon.
Max Life Forever Young is an unit-linked pension plan (ULPP) which allows you to save 35-60 per cent in equities and the rest in debt instruments. At maturity, the policyholder gets the higher of the fund value or the guaranteed sum. Guaranteed sum is equal to 101-110 per cent of the cumulative premiums paid till maturity depending on the choice of schemes - pension maximiser or pension preserver. The minimum age at entry is 30 years and the minimum vesting age under the plan is 50 years.
On vesting, the policyholder has the option to take an immediate annuity for the full amount or commute one-third of the amount and take an annuity for the remaining amount.
After IRDA’s crackdown on ULPPs in 2012, not many insurers launched products in this space.
This product from Max Life comes after a long lull in the ULPP space and is attractive with rider benefits. But, being a unit linked plan, it may be suitable only for investors with a long-term horizon and those who can stomach volatility linked to the markets.

India: Downward spiral: bnp paribas,

„ Monthly production’s downward surprise in June suggests industrial value added is likely to
have fallen in Q1 FY2014, while various indicators point to slower private services activity.
„ Faster government spending and agricultural output growth should have offered some help
but will not have been strong enough to prevent headline GDP growth from sliding further.
„ Our tracking estimate now pegs Q1 FY2014 GDP growth at 4.4% y/y, which would mark the
worst quarterly performance for a more than decade outside of the global financial crisis.
„ Unless ‘quantitative tightening’ is reversed quickly, downside risks to our below-consensus
GDP forecasts will continue to crystallise, ensuring that GDP growth has a ‘4 handle’.
On the back of May’s weak industrial data and RBI’s recent ‘quantitative tightening’ measures,
we have recently revised down our expectations for GDP growth in FY2014 to 5.2% (see India:
Quantitative tightening (for now) and India: The beatings will continue). But the latest stream of
data suggests downside risks to even our below-consensus GDP forecast continue to build.
In a latest sign of India’s economic slowdown gathering pace since the turn of the financial year,
provisional data released late yesterday showed industrial production surprising significantly to
the downside with a 2.2% y/y decline in July, the second annual drop in a row. June’s
disappointment also came along with a sizable downward revision to May’s reading to -2.8% y/y
from -1.6% as initially reported. Capital goods output, which, over time, corresponds closely to
the national accounts measure of fixed investment, was the key culprit behind the weak
performance over the past few months as business confidence appears to be collapsing but
weakness also looked increasingly evident in the consumer goods sector. June’s industrial
report completes the full complement for Q1 FY2014, with overall production contracting by an
estimated 3.6% q/q or 13.6% q/q annualised, pointing to an annual contraction of close to 0.5%
in industrial valued added in the national accounts after a 2.0% y/y gain in Q4 FY2013 (Chart 1).
Gauging momentum in the services segments is less straightforward. But we have developed a
coincident indicator which draws on the main indicators that RBI includes in its quarterly
assessment of the ex-industrial economy and offers a good guide to growth in private services
and construction. The indicator suggests growth in private services and construction activity
combined may have slowed to the weakest post-GFC in q/q terms, an assessment corroborated
by the latest PMI non-manufacturing survey. Adding in our assumption of faster community
services growth in line with the monthly fiscal data after the strict fiscal spending control late last
year (Chart 2), however, overall services and construction growth should still have seen some
sequential improvement in Q1, leaving the y/y rate down slightly from Q4 FY2013.
A better agriculture economy as output continued to recover from the weak monsoon last year
will not have been strong enough to offset weakness in the non-agricultural sector. Our tracking
estimate now pegs Q1 GDP growth at 4.4% y/y or 3.7% annualised (vs. 4.6% as previously
anticipated), which would mark the second-worst quarterly performance since June 2003 after
the GFC-induced low of 3.5% in March 2009. While still the envy of many developed countries,
our GDP forecast of 4.4% y/y would be well short of the post-GFC potential rate of c.7%. Unless
‘quantitative tightening’ is reversed quickly, downside risks to GDP will continue to crystallise,
ensuring that GDP growth has a ‘4 handle'.

Action Plan To Save Sinking Rupee: nirmal bang

We organised a conference call on 20 August, 2013 with Economic Affairs Secretary
Mr Arvind Mayaram to get an update on the government’s action plan in respect of a
sharply depreciating rupee. Mr Mayaram said the steep downward movement
witnessed in the past few days in the securities and currency markets is primarily a
panic reaction to external factors. Other countries like Indonesia, South Africa and
Brazil too faced the same stress in their markets, he said. As far as the internal
factors are concerned, he said the concerns are two-fold: the current account deficit
(CAD) expected to remain high in the current fiscal year and the inability of the
government to finance its CAD given India’s huge dependence on foreign inflows.
These concerns have aggravated on fears that the US Federal Reserve may taper its
bond purchase programme which could reduce foreign inflows and end up drawing
down the country’s foreign exchange reserves. However, Mr Mayaram said this line of
thinking is completely unwarranted because the government has come out with
estimates and set targets so that the CAD is contained and at the same time financed
without a draw-down on foreign exchange reserves. In a worst-case scenario, if
exports remain at the level witnessed in FY13, FII inflows come to a standstill and
also foreign direct investment (FDI) stays flat at the FY13 level, then the CAD is seen
at US$75bn.
The two-pronged strategy of the government to address the US$75bn CAD and the Balance
of Payments situation is as follows:
1. Compression of imports:
a. Precious metal imports: The government aims to curtail imports of precious
metals like gold, silver and platinum. It believes that if gold imports are curtailed at
850mt in FY14 compared to 950mt in FY13, then the CAD would get compressed
by around US$4bn, bringing it down to US$71bn from US$75bn.
b. Oil imports: The import growth has declined. To cite an instance, growth in oil
imports in 1QFY14 stood at 0.8% YoY compared to 18% in 1QFY13.This
indicates that the compression in oil imports by around US$1bn in FY14 over
FY13, would aid in bringing down the CAD to US$70bn in this fiscal year.
2. Capital account:
According to the government, if capital inflows into India are estimated at US$64bn,
then to bridge the CAD gap the country needs only US$6bn (US$70bn minus US$64bn
= US$6bn). However, the measures taken by the government to enhance capital inflows
into the country are expected to bring in an additional US$11bn over and above the
estimated US$64bn. Consequently, India would be able to accrue US$5bn to its foreign
exchange reserves.
The government expects the CAD at 3.7% of the gross domestic product (GDP).
While the FIIs remained net buyers in the equity segment, the bond-sell off was on concerns
over likely tapering of QE3 (Quantitative Easing 3) programme by the US Fed and
hardening of US bond yields. Debt market outflow was also due to unhedged foreign
exposure of the corporate sector. However, long-term investment by foreign investors is
expected to continue at the levels witnessed before the onset of QE3 programme. FIIs seem
to be more confident about the Indian economy compared to domestic investors.
The capital flight, especially from bond market, is primarily because of the steep surge in US
bond yields. Also, it is important to note that the US Fed may not be able to withdraw its
QE3 programme completely, given its domestic macro-economic compulsions. The Indian
government has no intention to put capital controls. The recent measures do not indicate
that India is in a crisis situation as the country has a buffer of US$280bn of foreign
exchange reserves.

RBI Announces Measures to Stabilize Bond Markets ::Morgan Stanley Research

RBI Announces Measures to
Stabilize Bond Markets
What’s new? Reserve Bank of India announced
measures to stabilize domestic bond markets.
The measures announced on August 20, include:
Open market purchases: The Reserve Bank of India
will conduct open market purchase of long dated g-secs
worth Rs80bn (~US$1.3bn) on August 23, and it will
calibrate the purchase both in terms of quantum and
frequency, as may be warranted by the evolving market
conditions.
Measures on prudential adjustments for banks: The
hardening in long end yields and consequent mark-to-
market losses for banks led the RBI to announce the
following:
 Allow banks to retain SLR (statutory liquidity ratio)
holding at 24.5% of their Net Demand and Time
Liabilities (NDTL) in the held to maturity (HTM)
category (vs. earlier requirement of 23% over time).
 Allow banks to transfer SLR securities to the HTM
category from available for sale (AFS)/held for trading
(HFT) categories up to the limit of 24.5% as a
one-time measure. Banks can shift these bonds at
prices as of July 15, the date of the first RBI action.
 Banks can spread the net depreciation, if any, on
account of mark-to-market (MTM) valuation of
securities held under the AFS/HFT categories over
the remaining period of the current financial year in
equal installments.

RBI Announces Capital Account Restrictions For Residents :: Morgan Stanley Research

RBI Announces Capital
Account Restrictions For
Residents
Capital Account Restrictions: During the boom period
of 2004-07 when capital inflows were rising sharply RBI
had initiated gradual liberalization of capital account
transactions for the resident corporate sector and
individuals. The recent balance of payment stress has
pushed the central bank to reverse some of those
measures partially. The measures announced today
include:
 Outbound FDI limits: The limit for Overseas
Direct Investment (ODI) under the automatic
route for all fresh ODI transactions has been
reduced from 400% of the net worth of an
Indian Party to 100% of its net worth. This
reduced limit would also apply to remittances
made under the ODI scheme by Indian
Companies for setting up unincorporated
entities outside India in the energy and natural
resources sectors. This reduction in limit,
however, would not apply to ODI by Navratna
public sector undertakings (PSUs), ONGC
Videsh Limited and Oil India in overseas
unincorporated entities and incorporated
entities, in the oil sector.
 Outward remittances by individuals: The
limit for remittances by Resident Individuals
under the Liberalised Remittance Scheme
(LRS Scheme) has been reduced from USD
200,000 to USD 75,000 per financial year.
 Restrictions on application of outward
remittances: While current restrictions on the
use of LRS for prohibited transactions, such as,
margin trading and lottery would continue, use
of LRS for acquisition of immovable property
outside India directly or indirectly will,
henceforth, not be allowed.

MS- Whiteboard Video Indian Banks Bear Case Firmly in Play

http://linkback.morganstanley.com/web/sendlink/webapp/BMServlet?file=o8tg0kpq-3oo8-g002-8f37-d8d3855a5600&store=0&d=1&user=kqvwppbtnhvh-2&__gda__=1503055606_116f50e2640816f0cac99e1bdc446687#.m4v

Asia Banks Entering an NPL Cycle? :: Morgan Stanley Research

Asia Banks
Entering an NPL Cycle?
Last decade was good for Asian banks, with credit
costs declining structurally. This was helped by
strong GDP growth and low rates – both are turning.
Banks to avoid are in CAD economies with strong
trailing loan growth – India, Indonesia. Relatively,
we would own banks in DM Asia – HK, Taiwan.
Banks in EM Asia (especially India and Indonesia)
have been under pressure over the last month – The
question being asked is whether investors should buy
them, given the structural growth embedded into these
names. We would stay away for now. Real rates are
likely on a structural uptrend with global liquidity ebbing.
This is coming in the backdrop of slowing GDP growth,
generally not good for the NPL outlook.
All the ingredients of an NPL cycle are present in
Asia – strong trailing loan growth, slowing economy,
higher rates and tightening credit standards. Corporate
leverage has increased meaningfully and the changing
economic backdrop will likely cause some losses. The
way out for banks would be a decline in interest rates – if
the global liquidity situation turns buoyant.
Which banks are most exposed – We run four
screens across countries: 1) Current account balance;
2) unseasoned loan book (loans created in the last two
years), as these loans are riskiest when the cycle turns;
3) profitability (PPoP margin) – how much credit costs
banks can take before hitting book value; and 4) loan-to-
deposit ratios, given rates are rising. The most affected
are in India and Indonesia, while the best-placed banks
on these screens are in Taiwan, Malaysia and HK.
Stocks we would own – We continue to like Taiwan
banks (strong liquidity, exposure to US improvement
and low asset quality risk). The top picks are Fubon,
Mega and Chinatrust. BOCHK should also do well, given
its balance sheet strength – even Hang Seng would
make the cut if it reduced its China exposure (through
Industrial Bank). We also like Singapore, despite the
strong loan growth, given their access to liquidity and the
strength of their government’s balance sheet

Equity Inflows Moderate in DM, Outflows Continue in EM  Citi Research

 Equity Inflows Moderate in DM, Outflows Continue in EM
 7
th week of inflow into equity funds — In the week ended 8/14/2013, bond funds saw
US$1.4bn of outflow, and US$1.3bn of inflow went into equity funds. This was the 7th
week of inflow into equities even though it has slowed from the previous week’s
US$9.6bn. European equity funds were the largest sources of inflows with US$2.3bn,
while US equity funds ended its 6-week outflow streak with an outflow of US$2.1bn.
 US$761mn (0.1%AUM) of outflow from EM — EM Asia funds saw US$588mn of
outflow, within which China funds had the largest outflow at US$241mn. This has been
the 13th week of outflow from China funds. GEM funds, LatAm and EMEA funds all had
moderate outflows.
 Foreigners net sell Japan and Asia— In the week ended 8/14/2013, foreigners sold
US$710mn of Asian equities. The Taiwan stock exchange saw foreigners net sell
US$622mn. Korea, however, had foreigners buying US$215mn of equities. Japan, as
of 8/9/2013, saw the 3rd week of net selling by US$1.1bn, showing some profit taking
by investors after TOPIX rose by 20+% YTD in US$ term..

The Frog Prince : Morgan Stanley Research

The Frog Prince
In the fairy tale, The Frog Prince, a magical kiss transforms the cursed frog
into a handsome prince. In a similar vein, Warren Buffett, in his inimitable
style, describes acquisition hungry CEOs as being “mesmerized by their
childhood reading of the frog kissing princess. Remembering her success
they pay dearly for the right to kiss corporate toads, expecting wondrous
transfigurations”1
. Buffett might as well have been talking about promised
corporate turnaround stories.
Legendary fund manager, Anthony Bolton in his book ‘Investing against the
tide’, has devoted a chapter to ‘My favourite type of share’. Expectedly, these
are turnaround stocks that he invested in before the market fully appreciated
the change. Successful corporate turnaround stories always make for
interesting reading, such as Steve Jobs’ return to build Apple into one of the
world’s greatest corporations which will soon be made into a motion picture
or Lee Iacocca’s bestseller about battle for Chrysler’s survival. Straight-forward
as it may sound, as portfolio managers we can assure you that predicting such
winners is far from easy. Stock investors stand to reap outsized returns if they
get it right but such opportunities are few and far. Many stocks are pitched as
turnaround stories but the experience is that maybe one in ten actually lives up
to the hype. Given the odds, the risk is that in pursuit of that elusive multibagger, one ends up buying many duds. The real skill then is to find the prince
without having to kiss a hundred frogs.
From our toad-kissing experiences, there have been certain signposts that have
helped us improve our odds of unearthing some of these turnaround stories
while helping sieve out the duds. In most cases, turnarounds are associated
with new management teams or some sort of leadership change. As portfolio
managers, we assign a high weightage to face to face meetings with the CEO
and the management team. Listening to them to gain an understanding
of management strategy is especially important in these situations. This is
different from a normal maintenance meeting with a management whose
stock you already own and would then focus just on the current issues. Here is
the ‘turnaround checklist’ that we carry to these meetings.
•  Diagnosis: What’s working, what needs to be fixed? CEOs that attribute
all the woes to the macro-economic situation or those who want to
overhaul the entire organisational structures and processes haven’t
adequately diagnosed the problem. The idea is to look for surgeons with
scalpels rather than butchers with knives.

India Economic Watch Message from Friday’s sell off: FX, FX... FX :: BofA Merrill Lynch

India Economic Watch
Message from Friday’s sell off:
FX, FX... FX
Bottom line: Recouping FX reserves key to INR stability
Friday's market sell off supports our standing call that the INR will not stabilize
until the RBI recoups FX. We fully sympathize with Delhi that it did not intend to
"capital control" with its FX measures. Yet, the harsh reality is that markets will
only get more nervous till import cover reverts to the 8-10 months critical for
stability. We publish our replies to recent client queries. How much more can the
RBI sell? US$25bn, but every US Dollar sold will only breed further questions
about the adequacy of FX reserves. Second, what more can the RBI do? Issue
NRI bonds (US$20bn) or sovereign bonds (US$5bn a year) to hold Rs58-62/USD;
expectations are otherwise climbing to Rs65/USD. The present FX measures will
likely add US$5bn to FX reserves. Finally, how long can the July tightening last?
We see FY14 growth plummeting to 4.8% if the RBI persists with them into the
busy October-March industrial season. Do read our Rupee Dilemma report here.
8-10 months' import cover critical for investor confidence
Friday's market sell off supports our standing call that the INR will not stabilize
until the RBI recoups FX. We fully sympathize with Delhi that it did not intend
"capital control" with last week’s FX measures. Yet, the harsh reality is that
markets will only get more and more nervous till import cover reverts to the 8-10
months critical for stability (Chart 1), in our view. In the past 5 years, it has halved
to 7 months, trailing BRIC levels (Table 1). Chart 2 shows how much this has hurt
the INR. For the same US Dollar of 1.32/€, the INR has depreciated as the import
cover has come off. Do read our last Battle for Rs60 report here.
It is quite usual to vary FX limits up or down depending on capital flows. We thus
do not see reducing overseas direct investment under automatic route to 100% of
net worth from 400% (impact US$2bn BAMLe) or restricting the funds residents
can send abroad to US$75,000 from US$200,000 (impact: US$0.5bn BAML) as
capital controls. Banning residents from buying property abroad under the LRS
probably qualifies, but barely US$77mn has left on this head in FY13. That said,
investor confidence will likely not stabilize till the RBI rebuilds FX.
1. RBI can sell US$25bn; barely enough for 1 more FX crisis
How much more can the RBI sell to calm the market? US$25bn, but every US
Dollar will only breed further questions about the adequacy of FX reserves. Each
FX crisis costs US$15-20bn. There, thus, is just about enough to last one more
bout of FX volatility. It will be recalled that we had estimated that the RBI can sell
US$30bn at the beginning of the present round; since then, the RBI has sold
about US$5bn. And why US$25bn? Because the import cover will dip then to 6
months, last seen in 1993!. FX reserves will also come off to just 1.5x of 1-year's
short-term external debt, only barely higher than the Greenspan-Guidotti rule of
1x