Category: Macro Posts

Why Indian IT is worried

Most common visas issued by US

The breakdown by sector

The breakdown by country

In light of the 85,000 foreign tech workers allowed to be brought into the US annually under the H-1B visa program – a limit, tech companies have been clamoring to raise – here’s a stunning forecast by the Bureau of Labor Statistics:

Employment of computer and information technology occupations is projected to grow 12% from 2014 to 2024, faster than the average for all occupations. These occupations are expected to add about 488,500 new jobs, from about 3.9 million jobs to about 4.4 million jobs from 2014 to 2024, in part due to a greater emphasis on cloud computing, the collection and storage of big data, more everyday items becoming connected to the Internet in what is commonly referred to as the “Internet of things,” and the continued demand for mobile computing.

That’s exciting news. So 488,500 IT jobs requiring more skill, knowledge and education than an average techie will be created over ten years,  about 44,850 a year on average, which means over the same decade, 850,000 H-1B visa holders would come to the US to fill these 488,500 IT jobs…. You get the idea.

 

 

CITI EM Inflation surprise index at 5 year high and Market wants a rate cut

Citi publishes Emerging Market inflation suprise index every month . It measures price surprise relative to expectation . A positive reading means inflation is higher than expected and negative reading means that inflation has been lower than expected.This number which was benign at -0.59 as on 30th nov jumped to 7.01 in the latest january reading . This reading is at a 5 year high.India Repo rate has largely has a high correlation with this index till early months of 2016 when they started diverging, and this divergence also stands at all time high today.As i had discused in my previous article demonetisation led to agri commodities prices falling sharply as lack of money with traders resulted in dramatic fall in food prices in last three months dragging overall inflation down.This was at a time when world FAO food price index touched a two year high.

There is one more point which needs consideration. At the time of dollar strength it is important that countries running current account deficit like India should keep an extra margin of safety in the form of higher than normal interest rate differentials so as to protect currency volatility. The incoming Trump administration might not want strong dollar , the action on border tax, fiscal stimulus, lower taxes will all lead to stronger dollar in future.

Will RBI  take into account strong dollar and look through the recent fall in inflation and instead prepare the market for end of easing?

 

 

 

Global food prices on a sprint, up 16% in last one year, diverge from Indian prices

According to the Food and Agricultural organisation, The FAO Food Price Index* (FFPI) averaged 173.8 points in January 2017, up 3.7 points (2.1 percent) from the revised December 2016 value. At this level, the FFPI is at its highest value since February 2015 and as much as 24.5 points (16.4 percent) above its level in the corresponding period last year. The strong rebound in the January value of the FFPI was driven by a surge in international sugar prices and sharp increase in export prices of cereals as well as vegetable oils. Meat and dairy markets remained more stable. FAO’s Food Price Index is a trade-weighted index tracking international market prices for five major food commodity groups.

While 2016 marked the fifth consecutive year the index has fallen, January 2017 marked its sixth monthly increase in a row. Take the instance of wheat, where depressed prices till August led to one of the lowest planting worldwide.

(Money managers remain bearish — they’ve bet on lower prices for 17 months straight)

But there are signs the glut may not last much longer, or at least that supplies may tighten enough to halt the four-year slump in wheat futures.Farmers are planting less because many are losing money. At the same time, global consumption is at an all-time high. And the risk of crop-damaging weather lingers over key exporting countries this year. As Rabobank says there is a “real possibility” of a supply shock in the U.S. and Europe if farmers shift to more profitable crops.

An NIFPB research paper has found strong correlation between global and domestic food prices although the correlation is not as tight at individual commodity levels. The correlation broke down since Nov 2016, and the reason in my view is demonetisation. There is no denying the fact that good monsoon led to better planting but demonetisation led to perishable commodities getting dumped at throwaway prices as shortage of cash with traders led to sharply falling prices and hence low food inflation.

I think low food inflation in India is behind us and it is poised to rise and catch up to its correlation to world agri prices which are going through perfect storm of low planting, high global consumption and tight supplies.
Rural India has gone through rough phase in last few years, first depressed agri output prices and then demonetisation. Rising global food prices coupled with increased budgetary allocation for MNREGA and rural development bodes well for rural economy.
Bet on rural economy, rising soft commodity prices and higher inflation

Mega Trend favors inflation,PSU’s , and protectionism beneficiaries

I did an online chat with REUTERS http://bit.ly/2kYpLDG yesterday where i discussed my views on budget,mega trend in making and interest rate cycle.I see reversal of few established trends with bigger governments and expansion of PSU role, reversal of low interest rate regime, return of inflation and surprisingly beneficiaries of protectionism (PSU banks) in this chat.

You, yes you my dear real estate investor

India has till 2007 seen a fair breakup of physical and financial savings at household level split evenly between physical (gold and real estate) and financial savings (mainly bank deposits). The trend took a turn in 2009 as government panicked post Lehman crash and pumped lot of money into the economy leading to high inflation in capacity constrained environment. Inflation spiked but RBI never increased the interest rates high enough to counter inflation. high inflation coupled with substantial increase of high denomination old notes (500 and 1000) in circulation led to two important trends
1. Overall savings started dropping
2. Financial savings losing ground to physical savings as inflation reduced the value of money and Indians being smart to maintain the value of money bought land and real estate. By 2013 at household level physical savings constituted 72% and financial savings came down to 28%.
Then Dr Rajan became RBI governor in 2013 and the first thing he did was to target inflation. Low inflation coupled with high interest rates to compensate savers for loss of purchasing power led to moderation in real estate price appreciation and start of shift to financial savings as money was not losing value anymore. But, what to do of black money which was sloshing in this industry? govt has come out with various measures over last couple of years to eliminate black money and most will agree that it has reduced substantially in all property transactions. So as chuck prince said, When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. The music has stopped and with the measures announced in this budget the door to get out of the party has also closed.
Manish bhandari of valuenomics was the original bear of real estate way back in 2013 valuenomics-real-estate-2013
and this is what he had to say
The theme played out this budget has been stringent measures are the final nail in the coffin to deflate real estate prices. The Finance Minister has broken the malaise of closed loop of circular money circulation in Real Estate sector (sale of one real estate proceed going to purchase of another real estate to save capital gain) or sometimes half-heartedly trickling to NHAI/REC bonds with 3 years of lock in. It is noticeable that physical assets (Real Estate, Jewellery) accounts for 50% while equity allocation is less than two percent of households assets This is done by following policy measures:
Lowering the capital gain years threshold to 2 years for claiming capital gains, signal’s a genuine attempt to encourage people to exit their real estate holding at much faster pace than before and alternatively find more productive other investment avenues.
The budget has indicated that many more bonds will be opened to channelize money in financial instrument from sale of real estate proceeds. This will encourage big financial migration from the sector where investors are getting dissuaded by low investment returns over last two years.
Last attempt, in form of tax rebate for one year by persuading builders to liquidate inventory over one year cycle after receiving commencement certificate in order to augment supply in the system.
However, the final straw on investors back is limiting notional loss from house property to Rs 2 lacs per annum instead of unlimited tax shield created by misguided policy under Sec 71 of IT Act. I have written about misuse of this policy on various occasions as property investors have crowded the property markets for the last decade, pushing actual user far off. Now, this will push HNI investors out of property market for years to come. To my belief, no policy measure will have such a far reaching impact on driving down property prices than this one.
These stringent measures will have long term repercussion resulting in lower land prices, enhancing supply of land in the system and dissuading investors from hoarding of land, apartments.
Now the question remains why government has chosen to remain silent about taxation on Long term capital gain, despite the loud roar of our Prime Minister, in Jan 2017 at Mumbai. The answer lies in scanning through the recent history of Divestment program of the Government. We are running an ambitious divestment target (Rs 72,500 Crs.) and it was necessary to cheer the mood and set the stage right for the financial markets.
The byproduct of this exercise is an avalanche of investment flow into financial markets especially equities where tax incidence in long term capital creation is Nil. I have spoken about impending households savings to financial assets on various occasion, the policies in this budget has expedited the financial migration process.

Infra development last hope to revive animal spirits

India is currently growing at 11% nominal GDP with high underinvestment in infra sector as per Mckinsey report.

Among various heads where allocations have increased in this budget, infra has the highest multiplier to growth. if the budgetary allocation to various infra agencies is properly mixed with market borrowing when interest rates ,credit growth( which mimicks M3) are probably the lowest in last few years the multiplier can be fairly large

if anybody thinks that recapitalisation and retail lending will solve indian banks problem they dont understand the importance of high nominal GDP

increased infra lending with safegaurds and clear laws,can easily push credit growth rates to digits which will be adequate to push capacity utilisation rates higher and in turn incentivise private sector to start new capex cycle. sounds easy i know but this is our last chance before India gets into debt trap

Apple gets a helping hand from demonetisation

Apple posted all time high global sales of 78.29 million units last quarter ,higher than analyst estimates in the results released yesterday .During October-December 2016, the iPhone maker also clocked an “all-time record revenue” from India, Apple CEO Tim Cook told analysts during a post-earnings call on Jan. 31. As per counterpoint research note iPhone achieved a landmark, crossing 2.5 Million units in a calendar year, with a 1/3 of its total shipment coming alone from the record fourth quarter driven by seasonality and the launch of iPhone 7. Apple had emerged as an unlikely beneficiary of the note ban as many consumers looking to do away with their stash reportedly bought expensive iPhones. In the three days following demonetisation, around 100,000 iPhones were sold in India, which is about three-fourth of the average monthly sales of the device in the country, The Economic Times reported.I doubt that Apple will get the same helping hand again

Housing Finance ……….The last hurrah

Housing finance portfolios of Indian Banks and HFC’s have arguably been the best performing asset class in the last 15 years, with delinquency ratios across most lenders at less than 100bp and their credit costs at less than 30bp. However, the period was marked by a sustained increase in property prices, and not necessarily a fall in interest rates. Housing finance portfolios had extra cushion in form of cash down payment which was an integral part of majority of home purchases in India paid out of the pocket of buyer. Rising property prices, nominal GDP growth ( real growth plus inflation) rates of 13-15% for better part of this century created excellent employment opportunities and double digit salary growth all led to this Physical asset scoring over any other asset class. The turf is now becoming more competitive as more banks with attractive deposit franchise jostle for market share in absence of credit growth from their traditional corporate borrowers. India Ratings in this report talks about smaller room for growth for large ticket housing loans .
I see few more headwinds emerging for real estate over next few years based on my understanding of Macro.
1. Rise in Real estate prices in past were more a function of rising inflation which led to value of money falling dramatically hence rising property prices.With inflation targeting adopted by RBI, demonetisation, which will reduce the black money proportion in real estate transactions, RERA act (real estate regulation act), Implementation of Benami transaction act (Income tax crackdown begins: 87 notices issued, 42 assets worth crores attached under Benami Act ) it is highly unlikely that we will see real estate prices rising like before.
2. I see nominal GDP growth in next couple of years at around 10-12% driven more by government expenditure rather than private sector. This will certainly impact the profitability of corporate India and in turn will lead to muted wage growth for the employees. In fact,rightsizing (read downsizing) is the new word. Consider this,number of employees employed in IT sector is negative YOY for the first time since 2000. The country’s biggest bank by market cap HDFC Bank shed 4500 employees for the first-time bank has started operations. The insecurity in private sector employees has started to creep in and the companies catering to outsourcing are already feeling jittery after Trump election
3. HFC’s which cater to small value loans will not be effected as govt expenditure is set to rise for this section of society in run up to Lok Sabha election to be held in 2019. There are also signs that agricultural commodities have bottomed out with the classic theory of “Poverty amidst plenty” slowly reducing the crop planted in main agricultural regions of western world.I see rising soft commodities prices, which should positively affect the balance sheets of rural households.
The debt/ GDP for household in India is not at alarming levels as compared to other Emerging countries, but in absence of strong nominal GDP growth we will reach there in next 2-3 years and that is when music stops for lenders and delinquencies will start rising.
India Ratings report
HFCs – india ratings

VIX hit lowest level in 10 years

VIX (volatility index)index hit the lowest level since 2007 before recovering a bit on Friday . VIX is a trademarked ticker symbol for the CBOE Volatility Index, a popular measure of the implied volatility of S&P 500 index options; the VIX is calculated by the Chicago Board Options Exchange (CBOE). Often referred to as the fear index or the fear gauge, the VIX represents one measure of the market’s expectation of stock market volatility over the next 30-day period. Low level of VIX is often associated with high stock prices and high complacency and high VIX is often correlated to low and volatile stocks prices and great time to buy stocks

Indian VIX is also correlated to US VIX most of the time and although Indian equity markets have not touched a new high like US equity markets, Indian markets VIX at 16 is near lowest end.

The following chart of global policy and VIX has also diverged . As per Gavekl Based on the level of the economic policy uncertainty in the world, a regression model would have predicted that the VIX would be pushing 30 instead of hovering around 10


So where is the equity market getting this confidence?
These days, markets have grown convinced that Beijing will avert Chinese financial and economic crisis. The Bank of Japan will secure bond prices in Tokyo – no matter how much government debt is issued. The ECB will hold together Italy, Portugal, Spain and euro integration more generally. The Fed will not tolerate any meaningful tightening of financial conditions, ensuring the sustainability of bull markets in U.S. financial assets. The U.S. and king dollar provide a stable foundation for global finance that, along with ongoing Chinese growth, will hold EM debt crisis at bay. And, more generally, the Fed and international central bankers will continue backstopping global markets, guaranteeing ample liquidity and buoyant securities prices. Bear markets – let alone crisis – are simply intolerable. Even if calm prevails, markets have grown way too complacent regarding the global monetary backdrop. So many unknowns. So many things that could go wrong. Whenever it unfolds, the next de-risking/de-leveraging episode should be quite captivating.

Tsunami of disruption in financial services

Things are becoming more difficult with launch of UPI as UPI although helps the banks, the incumbents, but it helps the challengers even more. If I am using the UPI app, I don’t have to think much about the bank I am sending the money to or requesting money from—the same way I don’t think about my telecom service provider when I send a WhatsApp message to a friend. Almost everything about the bank—most importantly the bank account number, the primary identity—is hidden behind a simple virtual payment address (VPA), the new identity. The bigger your customer base, the more worried you will be. The way Ola and Uber understands taxi business better than taxi guys, technology guys know more about banking than the other way around. In this Panel discussion Ritesh Pai of Yes Bank, Viiay Shekhar Sharma of Paytm and Adhil Shetty of Bank Bazaar- which aggregates bank products- give some interesting insights. Adhil Shetty talks about how 7 million customers are coming to his site for product offerings from 30 banks. In a survey of net savvy banking customers held last year, 45% took financial decision by doing the research themselves. This percentage of people is now at 75% this year. Paytm is on the way to launch its payments bank. Currently this e-wallet company has a base of 100 million customers. If every paytm customer keeps a minimum of Rs.1,000/- in their Paytm wallet it amounts to approx. USD 2 billion of daily float at zero cost.

Must watch for everybody associated with financial services