Market Maven

@MarketMavn

Monitoring Indian stock market & businesses Analyzing macroeconomic & industry trends Tweets for information purposes only, not an investment advice

Joined June 2020

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445 Followers

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Vikas Vij

@TheClubJunto

over 1 year ago

UBS REPORT ON INDIA’S GROWTH SLOWDOWN: A SIMPLIFIED EXPLAINER 1. For the first time in decades, a leading global investment bank has used the words “There are structural aspects to India’s growth slowdown.” These “structural aspects” cannot be termed temporary or cyclical, UBS says in its recent report on the Indian economy. 2. UBS has not issued a “general” market report. It has specifically advised its global clients to short the rupee (buy bearish rupee options) + buy interest rate swaps (betting on interest rate cuts in the future to stimulate the economy) providing them with a precise investing strategy, which is bearish on India. 3. Global investment banks, such as UBS, enforce “Chinese Walls” (information barriers) between different divisions of the bank to eliminate conflict of interest. So, different divisions can have different views and strategies. 4. The Research Division of UBS has issued a deeply bearish report on India (which is the subject of this post.) Other divisions, such as Trading Desk, Advisory, or Asset Management can issue different reports or provide different advice to their clients, depending on individual client risk profiles and goals. 5. The research division for Emerging Markets Strategy at UBS is headed by Manik Narain, who is a top Emerging Markets specialist with UBS in London for many years. His department operates independently from all other divisions. WHAT DOES THE UBS NARAIN REPORT SAY 1. Structural Aspects: There are “structural aspects to India’s growth slowdown.” It means, certain problems are embedded in the economic policy framework of India, which may require deep reforms and long-term corrective measures. These are not cyclical, and you cannot wish them away with a “chalta hai” attitude. 2. Earnings Moderation is Spreading: Narain says that corporate earnings moderation is spreading to the “defensive sectors” of the economy, such as consumer staples (dal-roti). Note: Remember, nearly one year ago, the economist Dr. Arvind Subramanian had publicly stated: “It is absolutely mystifying to me that India’s GDP is growing at 7.5%, while household consumption is at 3%. I simply cannot understand this. The numbers don’t add up.” 3. Highest Interest-to-Revenue Ratio: Narain says that India’s Debt Service-to-Revenue ratio is one of the highest among Emerging Markets. Debt Servicing Cost = Interest + Principal repayments on your debt. India has a high national debt. The Indian government borrows from banks and financial institutions within our own country when its tax revenue collection is not enough to pay for all government expenditures. There is no urgent obligation to repay the principal amount, but the “interest” on that debt must be paid every year (as per global accounting norms.) India’s highest cost component in the annual government expenditure is “Interest” on the national debt – over 25% at present. This is higher than what the Indian government spends on defence or public infrastructure etc. in the annual budget. 4. Higher-for-Longer US Yield Environment: Narain says that if the yields (interest rates) on US Treasuries remain higher for a longer period, while the RBI is forced to cut interest rates in India (to stimulate demand), the foreign investors will further lose the incentive to keep their money in India. Foreign investors look at “risk-adjusted returns”. It means, if they invest in bonds in an Emerging Market like India, they want a risk premium because of rupee volatility and other risks. On the other hand, US Treasuries are considered the safest investment in the world because they are backed by the US government. Even as we speak, the foreign investors have been withdrawing from Indian bonds at a pace not seen since Covid 2020. 5. Net FDI Inflows Have Nosedived: Narain says that while investors are worried about India’s “Balance of Payments” position – at UBS the bigger concern is slowing FDI inflows. According to the RBI data: Net FDI Inflows (Inflows minus Outflows) FY23 (Apr ‘22 to Mar ‘23) @ $28 Billion FY24 (Apr ‘23 to Mar ‘24) @ $10.6 Billion (62% Decline Y-o-Y) Jan ‘24 to Dec ‘24 @ $3 Billion (this data point is provided by Narain) 6. Credit Growth is Moderating: Economic growth improves when the country's banks are able to provide credit (loans) to entrepreneurs to start new businesses, expand existing businesses, and generate employment and national income. Narain says that “equilibrium credit growth rate in India will go down from 16% per year to 10% per year.” The reason, he says, is that the Loan-to-Deposit Ratio (LDR) is stretched to the highest on record at 80%. An LDR of 80% means that if a bank has Rs. 100 in deposits, it lends out Rs. 80 from it. This is already the upper limit of safe lending practices, according to Narain. Unless the banks in India are able to generate more deposits from the public, they will have to cut back on lending growth to avoid the risk of bad loans to risky borrowers. 7. Stock Market Participation is High: The Indian stock market can no longer be called an “under-penetrated” (under-utilized) market. According to UBS calculations, public investments in the Indian stock market are already equivalent to 60% of bank deposits. It means for every Rs. 100 in bank deposits, Indian investors have Rs. 60 invested in equities. If you consider all the financial assets of Indian investors (including bank deposits, gold, and real estate), 23% of the entire Indian household wealth is already invested in the stock market, according to Narain. So, the scope for further penetration is diminishing, unless economic growth revives. 8. Stock Market Valuations are High: Based on UBS internal valuation methods (P/E ratio and P/B ratio etc.), India’s stocks are trading at 72% premium to the rest of the Emerging Markets in the world. This kind of premium was unheard of even 12 months ago, he says. Taken together, points # 7 and # 8 further explain why the foreign investors have been exiting from Indian stocks. THE BOTTOM LINE In the current Indian stock market scenario, the bulls definitely have a valid argument, and the bears too have a valid argument. Examine both sides of the argument based on data and facts. Then position your investments based on your own unemotional judgment. Charlie Munger said: "I never allow myself to have an opinion unless I know the other side's argument better than they themselves do." @arvindsubraman @arabicatrader @dugalira

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Ritesh Jain

@riteshmjn

over 1 year ago

UBS Says Structural Slowdown UBS Group AG is recommending investors should short India’s rupee and go underweight on the country’s stocks amid slowing economic growth, Bloomberg is reporting. The bank’s research group said India’s $4 trillion economy has entered a structural slowdown that can’t be explained by cyclical factors like oil-price hikes or declining government spending. A structural slowdown in India is a call no other institutional investor appears to have taken and of course no resident economist has said something like this. The deceleration is underpinned by a long-term moderation in credit growth, foreign direct investment, export competitiveness and earnings potential, UBS said. The “conventional wisdom that India is ‘far removed’ from Trump risk compared to other emerging markets is debatable,” said Manik Narain, head of EM strategy research at UBS. “A potentially higher-for-longer US yield environment poses challenges to India’s growth, with one of the highest debt service-to-revenue ratios in the major EM space.” Apart from the losses in equities UBS says India’s bonds are recording the fastest outflows since 2020 as euphoria over their inclusion in global bond indexes wanes. Market losses follow a slowing in real GDP growth over successive quarters, showing the Indian economy slipping below the 7% average generated before the Covid-19 pandemic. Disappointing business updates following a decade in which companies in the Sensex index failed to meet analyst expectations have underscored the bearish turn. UBS says that the moderation in India’s earnings growth is spreading to defensive parts of the economy — such as consumer-staples — showing that temporary factors such as government capital expenditure are not the only reasons behind the slowdown. Elsewhere, UBS says there is credit moderation, china deflation which will lead to tougher competition, slowing FDI which is a big concern as India saw only around $3 billion in the past 12 months. Equities are now 23% of the financial assets of Indian households and 60% of bank deposits. That means the market can no longer be termed “underpenetrated,” UBS said, adding that as per their valuation methodology, the country’s stocks trade at a 72% premium to the rest of emerging markets, a premium “unheard of even 12 months ago.”

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