Credit Suisse’s dreambeat: Make money cheap

Credit Suisse says that the  government needs to  persuade  RBI governor  D Subbarao  to  boost  growth  and  lower  debt servicing costs by  reducing  interest  rates. That’s classic pitch by a brokerage that wants a bull run on the back of cheaper money.

Credit Suisse, an international brokerage has said in its recent report on the Indian economy that while the budget will be influential, finance minister P Chidambaram should work hard to both help the rate cutting cause and avoid a sovereign debt downgrade in 2013. 


Economists in India feel that wholesale price inflation remained stubbornly high, despite the weakness of activity and commodity price inflation, throughout 2012.  Credit Suisse argues that it is easy to give  up  hope  of  seeing  a  material  decline  in  price  pressures even in 2013. There is  no  statistically  robust  evidence  of  a  structural  increase  in  inflation  and  the modelling work (by Credit Suisse analysts) suggests that core and headline WPI inflation will drop below 4% and 6% respectively by mid-2013. If this is right then the controversial view of another 125 basis points (bps) of repo rate reductions seems perfectly plausible, according to Credit Suisse analysts. After all, brokerages love nothing more than low interest rates which create a nice bull market. Analysts have shifted the timing of the final move to July from March, still expecting a 50 bps cut on 29th January.


On the forex front, Credit Suisse’s quantitative analysis suggests that the current account deficit will still shrink in 2013. Stronger growth bodes well for a lower fiscal deficit, while the government could surprise many with a tighter-than-expected February budget. Although the brokerage expects global import demand to strengthen in 2013 to the  benefit  of  Indian  exports,  industrial  production  in  India  is  also  set  to  pick  up, boosting imports. 


Credit Suisse is looking  forward  to a  further rally in local currency sovereign bonds, with the 10-year yield likely to fall at least as low as 7.5% by mid-year, also helped by the diminishing prospect of a  near-term  ratings  downgrade. Although  it  finds  it  hard  to  be  structurally positive  about  the  currency, it anticipates  a short-lived rally, most likely in the March quarter of 2013.


In its projections for the year 2013, Credit Suisse observes, “barring  significant upside  food  and/or  fuel  price  shocks  we  expect  headline  WPI  inflation  to  surprise the  current  market  consensus  of  7.6%  in  2012/13  and  6.5%  in  2013/14  on  the downside. We  are  looking  for  figures  of  7.4%  and  6%  respectively  (changed  from 7.2% and 6.2% previously).”


Credit Suisse in its projections also points out “In  2012/13  as  a  whole  we  now  expect  a  trade  deficit  of $195 billion (10.6% of GDP), shrinking to $175 billion in 2013/14 (8.3% of GDP). These in turn are likely  to  be  associated  with  current  account  deficits  of  around  $80 billion  (4.4%  of GDP) in the current financial year and $65 billion (3.0% of GDP) in 2013/14.  While the former  is  higher  than  the  last  forecast  of  4%  and  above  consensus,  the  latter  is quite a bit lower than the 3.5% figure,  previously expected and below consensus.”


On GDP growth, the analysts from Credit Suisse say, “We  have  made  a  small  further  downward  adjustment  to  our 2012/13  GDP  growth  forecast  to  5.7%  from  5.9%, while  opting  to  leave  our  2013/14 forecast at 6.9%  (the consensus  is at 5.5% and 6.5% respectively).  For the record, we are expecting growth to average an above-trend 7.5% in 2014/15, assuming the interest rate views, described below, are correct.”


On the bond market, Credit Suisse is optimistic despite threats from rating agencies like Fitch and predicts, “On the basis of  a  125 bps  of  repo  rate  reductions  our  bond  strategist  is  looking  for  the  10-year yield to fall at least as low as  7.5% by the middle of the calendar year.”


On rupee predictions, Credit Suisse is “looking for the rupee to be Rs53.50 against the US dollar in March, before dropping back to Rs56.5 by the end of 2013.”


BSE Sensex, Nifty in a sideways move: Thursday Closing Report

Nifty has to stay above 5,920 for another upmove

On par with the most of the Asian indices which were trading in the green the domestic indices too opened in the positive on news that China’s December exports were far larger than expected. The Sensex opened 61 points up at 19,728 while Nifty opened 27 points up at 5,999. We may now see the Nifty witnessing a sideways move, however the index has to stay above 5,920 for another upmove. The National Stock Exchange (NSE) saw an advance decline of 575:1146 while the volume was 89.64 crore shares.


China's trade surplus soared to $31.6 billion in December, thrashing estimates and widening sharply from a $19.6 billion surplus in November, aided by a strong growth in the country's exports. Official data released Thursday showed exports expanded 14.1% during the month from the year-earlier period, while imports grew 6%.


However this positive opening was short-lived and after hitting the intra day high, the indices soon started their downward journey to enter into a negative zone. The Sensex hit a lower intraday high of 19,784 while the Nifty too hit a lower high of 6,005 for the third day in a row.


After announcing a hike in railway fares, the government is now set to raising diesel prices by one rupee per month for 10 months and increasing the number of subsidised cylinders. A hike of Rs 4.50 per litre in diesel prices and that of Rs 100 per cylinder for LPG prices is expected. Planning Commission deputy chairperson Montek Singh Ahluwalia on Thursday said the government was looking to hike GDP growth to 8% in two to three years and was willing to take tough decisions.


The fall continued to make the indices hit a lower low on the indices. The Sensex hit a low of 19,596 while the Nifty hit a low of 5,947. However, soon the indices made a smart recovery to end marginally in the red with the news of approval of plan by the Cabinet to infuse Rs122 billion in state-run banks. India's state-run banks are facing rising non-performing assets (NPA) and write-offs because of poor lending decisions. Finance minister P Chidambaram said the combined injection of capital would not exceed the Rs150 billion provisioned in the budget for the fiscal year ending 2013, which is short of the banks' requirements.


The Sensex closed at 19,664, three points (0.02%) lower while the Nifty settled at 5,969, three points (0.05%) down.


Among the broader indices, the BSE Mid-cap index fell 0.49% and the BSE Small-cap index fell 0.54%.


The sectoral gainers were led by BSE Bankex (up 0.62%); BSE Oil & Gas (up 0.47%); BSE PSU index (up 0.32%); BSE Auto (up 0.31%) and BSE Realty (up 0.04%). BSE Power (down 0.93%); BSE Healthcare (down 0.70%); BSE Metal (down 0.63%); BSE Capital Goods (down 0.62%) and BSE TECk (down 0.37%) were the main losers.


Seven of the 30 stocks on the Sensex closed in the positive. The chief gainers were ONGC (up 3.41%); Tata Motors (up 2.07%); HDFC Bank (up 1.24%); SBI

(up 0.70%) and Coal India (up 0.49%). The key losers were BHEL (down 2.19%); Hindalco Industries (down 1.52%); TCS (down 1.35%); Sterlite Industries (down 1.28%) and Sun Pharma (down 0.99%).


The top two A Group gainers on the BSE were—Oil India (up 4.04%) and Tech Mahindra (up 4.02%).

The top two A Group losers on the BSE were— Engineers India (down 4.11%) and UltraTech Cement (down 3.42%).


The top two B Group gainers on the BSE were—Shree Rama Multi-Tech (up 19.91%) and RM Mohite Industries (up 19.85%).

The top two B Group losers on the BSE were— APW President (down 19.99%) and Parekh Aluminex (down 19.98%).


Out of the 50 stocks listed on the Nifty, 12 stocks settled in the positive. The major gainers were ONGC (up 3.70%); Tata Motors (up 1.97%); Bank of Baroda (up 1.47%); Axis Bank (up 1.44%) and HDFC Bank (up 0.97%).  The top losers were UltraTech Cement (down 3.18%)%); Ambuja Cements (down 2.84%); BHEL (down 2.28%); Hindalco Industries (down 2.01%) and Sesa Goa (down 1.85%).


The European Central Bank is due to release its monthly interest-rate decision later in the global day today, 10 January 2013. The Bank of England is also due to release its monthly interest-rate decision later in the day.


Except for Jakarta Composite (down 1.04%) and KLSE Composite (down 0.32%), all other Asian indices closed in green, with the highest gainer being the Taiwan Weighted (0.94% up). At the time of writing, two of the three key European indices were trading higher and the US stock futures were in the positive.


Back home, foreign institutional investors were net buyers of shares totaling Rs848.95 crore on Wednesday while domestic institutional investors were net sellers of equities aggregating Rs518.30 crore.


Punj Lloyd, stepped up its offer for the construction business of Macmahon Holdings, looking to trump a current deal with Leighton Holdings. Punj Lloyd unit Sembawang Australia said it would offer A$38 million for Macmahon's construction businesses, including its rail business. Alternatively, it is offering to beat Macmahon's existing A$20 million agreement with Leighton for the construction assets, minus the rail business, by A$5 million. Punj Lloyd fell 4.21% to close at Rs60.25 on the NSE.


Rolta International, a wholly owned subsidiary of Rolta India, has been awarded a $31 million (around Rs 170 crore) contract by the largest three-service municipal utility in the United States, Memphis Light Gas and Water (MLGW). The deal to be executed over the next two years, will see Rolta provide consulting, systems integration and software services. Rolta India fell 0.92% to close at Rs 64.55 on the NSE.


Is the auto industry booming or stagnating?

Auto and auto-ancillary companies had shut down for 10 days in Pune last month. The industry association is projecting no growth. And yet neither analysts nor the media are reporting anything negative. Many of the stocks are at their 52-week highs. What is the truth?

There has been something unusual going on in the last few weeks in the automotive and auto ancillary sectors. One of our sources in Pune tells us that automobile and auto ancillary companies in the city were shut down for 10 days in December. The closure was not scheduled. The reason is lack of demand, forcing most of the units in this auto belt to reluctantly shut down.


When we tweeted about this, to get more information, Pranay said that even Tata Motors in Jamshedpur was shut down for 10 days in late December.


And yet, automotive and auto-related stocks have been hitting 52-week highs of late in the Indian stock markets. For instance, companies like Tata Motors, Mahindra &Mahindra, Amara Raja Batteries, Bajaj Auto, Balkrishna Industries, Fiem Industries, MRF, Maruti Suzuki India, Minda Industries, Motherson Sumi Systems, Premier, Sundaram-Clayton, Swaraj Engines, to name a few, have all hit their 52-week highs of late. What is really going on?


According to Pune-based Pratik Singh lower sales forced him to temporarily close his auto ancillary factory. Higher inventories are expected to hit auto companies as demand and sales were reportedly poor (though the real scenario will be felt when quarterly results come out). It is believed that some small & medium automotive enterprises are also giving employees time off to curtail production and cut cost, according to Sachin Dixit. And yet, there is hardly any information in the media about the auto industry’s troubles.


Passenger car sales in the country declined by 12.5% in December 2012, the steepest fall in the last four months—due to high interest rates, rising fuel prices and overall slowdown in economic growth. All these would have been factored into share prices of automotive companies in general. Yet the market has shrugged off the news. Does that mean 2013 is going to be better? Not really, if the SIAM prognosis is anything to go by.


The auto industry body The Society of Indian Automobile Manufacturers (SIAM), has come up with a negative prognosis of the automobile sector stating that it will grow only by 0%-1%. It revised car sales projection for the fourth time in the current fiscal, forecasting no growth—down from the first ambitious estimation of up to 12%. This is a drastic downgrade. Furthermore, SIAM also said that the auto industry will miss its ambitious target of clocking an annual turnover of $145 billion by 2016 under the Automotive Mission Plan (AMP). “AMP target of annual turnover of $145 billion by 2016 is expected to be missed by $34 billion,” said S Sandilya, president of SIAM. “Going by the current trends, we do not think industry will be able to recover in the fourth quarter unless the government provides support,” Shandilya further added. The downward projection reflects severe slowdown in the industry across the segments.

In the weeks preceding SIAM’s announcement, several brokerages and financial institutions were gung-ho about the automotive sector doing well in 2013. Varun Goel, from Karvy Private Wealth, who spoke to CNBC, had said, “We also expect automobile sales to considerably revive this year.” Of course, Goldman Sachs, the one institution everyone looks up to, upgraded its outlook for the automotive sector to ‘overweight’, and has given positive opinions on Bajaj Auto and Tata Motors. India Infoline has listed Bajaj Auto and Exide Industries are one of the “Deadly Dozen” stocks to watch out for in 2013, with returns between 18% and 44%. Both CLSA and Credit Suisse have upgraded Tata Motors. Espirito Santo has advised clients to load up on auto ancillaries. Is there something going on that is keeping share prices buoyant that the Indian public isn’t aware of?


While it is true that select and specific companies may do well, even in difficult times, what is witnessed is a broad-based upward movement with many automotive companies touching their 52-week highs without any clear reasons to explain why, especially since a wealth of information just under the surface suggests that the industry is due for a difficult time. This has left many puzzled.


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