Dollar could strengthen more, creating headwinds for emerging markets, including India
The US dollar strength could prove a substantial headwind for emerging market relative performance, says Nomura Equity Research on the stock markets in India
From this point on, US monetary policy ‘normalization’ isn’t likely ever to recede far from market consciousness—leaving the US dollar structurally better supported medium-term, said Nomura Equity Research in its Global Equity Strategy report.
“Rounding the bend into H2 we remain focused on a likely global demand growth recovery into end-year as the most important determinant of medium-term equity performance. The pickup will be driven mostly by the US and Japan, but with spill-over benefits to other economies via trade and sentiment,” Nomura Equity Research said.
The US dollar strength, though, could prove a substantial headwind for emerging market relative performance. Indeed both stronger dollar prospects and China’s continued rebalancing away from investment-led growth leave us cautious on any robust or sustained energy/ metals price recovery in the second half of 2013. This would be particularly tough on the world’s extractive economies and/or primary industry-heavy markets, the brokerage opined.
While higher Treasury yields and resulting dollar gains ultimately reflect a strengthening US economy, Nomura is looking at a material impact on US earnings—for example the roughly 48% of S&P 500 earnings that come from outside the US, as well as that portion of recent supernormal US profits enabled only by (unsustainably) low corporate debt costs.
But for many of the non-US, non-EM markets—broadly, the ‘EAFE’ space—these trends need not pose an obstacle. If anything, with central banks in Japan and Europe still decidedly easing even as the Fed starts ticking through its re-entry checklist, monetary policy at the margin has begun more explicitly to favour its overweights in those two developed
Markets, says Nomura. And unlike market-destabilizing EM FX volatility, yen and euro downside (versus the dollar) would be viewed primarily as growth- and equity-positive – both as an export boost and reflation accelerant, the brokerage believes.
Nomura sees less to cheer about for developed Asia-Pacific markets though: Hong Kong’s property preponderance and dollar peg—a deflationary factor when its US-dollar anchor strengthens—leaves it vulnerable. And Australia’s ‘rebranding’ over the past year from passé ‘China play’ to ‘yield play’ turns out to have bought it only a brief reprieve now that receding Treasury fortunes have soured the yield-stock honeymoon too.
With recent US economic data pointing to a rather smart H2 US rebound coming together from the fiscal ‘sequester’-induced Q2 soft patch, we return to the notion that a US growth recovery should itself be the main argument for US equity underperformance, as stronger US demand supports global growth rates (and/or reduces global recession risks) and should underwrite an improvement in global investor risk tolerance as well, believes Nomura. After all, US stocks outperformed on the GFC downside as investors sought at-least comparative safe-haven exposure – a pattern that should technically be expected to reverse on the upside.
The prospect of eventual Fed tightening has not proven historically to catalyze outperformance by US stocks. Rather, more often than not, non-US developed (i.e. EAFE) equities have outperformed the US in the months immediately prior to and post Fed tightening:
Rounding the bend into H2 Nomura reiterates an underweight US equity allocation recommendation in favour of Japan, Developed Continental Europe (ex-UK) and EM Asia—where we see varying combinations of more conservative relative valuations and earnings assumptions, substantial equity under-ownership levels, and/or greater leverage to the likely pickup in US demand and ongoing decline in recent key global risks (such as intra-European politics and US fiscal uncertainty).
A common critique of Japanese stocks we often used to hear in recent years was that Japan “offers too little growth for the growth investors, but too little value for the value investors.” But arguably, with Japan’s robust earnings upgrades since late-2012, Japan now offers attractions from both the growth- and value perspectives.
It is instructive to note that despite their 63% net local-currency gains since mid-November, Japanese equities continue to present substantial value. In short, the Nikkei’s massive gains of the past seven months were not taking stocks into richly valued territory but have merely been reducing a state of deep undervaluation that reflected Japan’s poor economic performance amid the overly tight monetary policy of the past six years, when the other major central banks of the world were loosening with abandon and the BOJ was not, noted Nomura.
Thus, it was proved no great difficulty for Japan stocks to engineer a smart 15% locally denominated rebound since bottoming 13th June (and 7.8% even in US dollar terms), making it still the world’s best-performing major market/ region in dollar terms since the start of the second quarter.
The Japan sectors that thus far have rebounded the strongest from the volatility of May-June have largely been the more defensive sectors such as Telecoms, Consumer Staples, Healthcare and Utilities. But this should leave more upside room for the more cyclical and higher-beta sectors, we believe, as demand data and positive political developments materialize in the weeks ahead.
It is indeed hard to envision any sustained ‘success’ of Abenomics without a pickup in corporate capital spending. But Nomura’s Japan economics team notes that METI data for manufacturing capacity utilization at 76.7% (they regard 75% utilization as a threshold level for capex) as well as measures in the 11th January ‘emergency’ stimulus package to promote capex via advantageous tax-treatment and fiscal subsidies—as well as in the FY13 tax reform outline approved by the Cabinet on 29th January.
These incentives appear to have taken root in the substantially improved outlook revealed by the BOJ’s June-quarter Tankan survey (released on 1st July), in which large corporations’ capex plans were for a +5.5% y-y investment increase, up 7.5 percentage points from the -2% y-o-y decline suggested in the March survey, noted Nomura.
With such evidence accumulating of a secular reflationary inflection point in both household and corporate spending, one can’t help noticing the strong rebound already underway in both consensus GDP forecasts and (more to the point for equities) FY2014 consensus earnings estimates .
European (ex-UK) equities generated solid outperformance relative to their US counterparts in H2 2012. From 18th June through end-year, continental Europe provided a 19.1% total return in local-currency terms, versus much more muted 5.6% US returns. But since then European ex-UK stocks have turned laggard again, returning only 7% YTD against the US’ more robust 16.2%.
Among major sectors, only European Tech Hardware managed to outperform its US counterpart. Strong performance from Sweden-based Ericsson and Holland-based ASML drove gains in the former, but it was the 17% slide in Apple shares that was the biggest determinant of European outperformance over the US. Outside of this sector, virtually everything else in Europe lagged in H1 2013, with underperformance particularly strong in the Financials, Energy, Consumer Discretionary and Utilities sectors, noted Nomura.
Several factors were behind this broad-based relative performance reversal. For one, the US was relatively oversold heading into year-end due to ‘fiscal cliff’ concerns. Despite the economic drag that fiscal tightening is currently exerting on US growth, equity investors overestimated the impact, leaving the market ripe for a solid rise said the Nomura report.
Europe continued to rise into the late-May global correction, but gains during ‘risk-on’ phases have been weaker, and declines during global equity correction phases have been more severe. Importantly, gains on the back of ‘normalization’ had already occurred. Indeed, the sovereign spread tightening that occurred from the beginning of this year to the May lows was more modest (66bps on the 10-year Italian/Bund yield spread versus 131 in the June-Dec 2012 period). 
Against this backdrop—and considering that demand in Europe has stagnated—there was less reason for investors to push European stocks higher. Meanwhile, following the back-up in global bond yields that followed Fed chairman Bernanke’s 22nd May ‘tapering’ comments, willingness to hold equities in a highly indebted region where the monetary policy  transmission mechanisms are struggling to work declined even more sharply.
Looking ahead, Nomura believes this period of European equity market underperformance is largely behind it, and sees risk/reward as tilting back in continental Europe’s favour.
However, Nomura’s economists remain pessimistic on Europe’s own economic growth prospects, expecting quarterly real GDP growth in the Eurozone to be exactly 0% in H2 this year, as well as throughout 2014. “Against this backdrop, our recommended sector positioning generally de-emphasizes European sectors with relatively high domestic exposure. The main exceptions are Telecom Services, where we recommend a Neutral allocation, and Financials, where we are overweight,” says Nomura.


Westlife Development: Low or no volumes and 2,20,000% price rise!

Westlife Development has been locked in an upper circuit almost non-stop since January 2009. The reason: McDonalds' franchisee Hardcastle Restaurants became a direct subsidiary of this listed company. But why is it not classified an illiquid stock coming under the purview of the new call auction regulation?

Over the past seven trading days, the share price of Westlife Development has gone up by nearly 15% with just one share being traded every day. The stock has been hitting the upper circuit limit on each of the seven days. Over the past year the stock has moved up by over 3,531% from Rs7.88 on 21 May 2012 to Rs286 as on 3 July 2013. Excluding the bulk deals, on an average just 2-3 shares have been traded per day over the one year period. Westlife Development (Earlier named: Dhanaprayog Investments Co) used to offer investment and allied financial services, its license as a NBFC was cancelled in 2009. In December last year, Hardcastle Restaurants, the franchisee of American fast-food chain McDonald's, became a 100% subsidiary of Westlife Development. A company which is similar to Jubilant Foodworks? That’s what leading media houses think. A headline in the Economic Times reads, “Reverse merger makes McDonald’ franchisee parent Westlife Developments market darling.” A “market darling”, in which the ‘market’ cannot participate.

Three years back in June 2010, we had reported about the unusual trading and the huge surge in price at that time as well. (Read: Unquoted) Despite the poor financials, its stock price had gained 4,307% from 1 January 2009 to 27 April 2010. Trading volumes were suspiciously inconsistent over this period as well. There was no attractive business strategy that would sustain the price quoted. Obviously, some people knew what they were doing.

So what, rather who is driving this stock up to new highs? As per the latest shareholding disclosure dated March 2013, apart from the 12 shareholders that form the promoter group making up for 75% of the total shares, there are just 52 other shareholders of the company. Out of these 52 shareholders, four hold nearly 24.17% of the total number of shares. The remaining 0.83% of the shareholding (equivalent to approximately 1.50 lakh shares) is divided among the remaining 48 shareholders.

Insider Trading?

The BL Jatia group holds majority stake in Westlife Development. The Jatias have the McDonald franchise in India. There have been several bulk deals between the promoters - the most recent one on 19 June was the transfer of 6.30 lakh shares from Ushadevi Jatia to Amit Jatia. Earlier, the promoter Ushadevi Jatia had transferred 6.25 lakh shares to Smita Jatia, another promoter of the company. There have been several inter-promoter bulk deals in the past as well.

The market regulator recently came up with a regulation for illiquid stocks (Read: Curbing manipulation in illiquid stocks: Another harebrained idea by SEBI?). The company, however, is not classified as an illiquid stock despite the poor trade volumes. According to the watchdog, an illiquid stock is a stock that satisfies all of the following criteria:

 1. The average daily trading volume of the scrip in a quarter is less than 10,000;

 2. The average daily number of trades is less than 50 in a quarter;

 3. The scrip is classified at illiquid at all exchanges where it is traded.

Strangely, this company has managed to escape the purview of this regulation even though, excluding the bulk deals, on an average just 2-3 shares have been traded per day.

Regulatory charges

The company in the past has delayed in making disclosure of changes in shareholding to stock exchanges as required under regulation 6(4) of SEBI Takeover Code, 1997. Vide a consent order the company reached a settlement to pay just Rs30,000 in April 2009. Moneylife has pointed out earlier that consent orders have been inadequate in curbing malpractices. (Read: Are SEBI’s consent orders a sham?).

Winmore Leasing & Holdings which is a part of the promoter group of Westlife Development also reached a settlement of Rs1 lakh through a consent order in July 2009 for failure in making disclosure of shareholding/changes in shareholding to stock exchanges as required under regulations 6(2),6(4) for year 1997 and 8(3) for years 1998 to 1999 of SEBI Takeover Code, 1997.

Stock manipulation in the Indian market is rife. In every issue of Moneylife magazine we publish details of one such stock being manipulated in the ‘Unquoted’ section. Regulators may pretend that all is fine with the Indian markets but you would be astounded by the extent of price manipulation that goes on regularly under the nose of the market regulator Securities and Exchange Board of India (SEBI) and the two main stock exchanges, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). We have written a cover story as well on this issue (Read: Stock Manipulation). The regulator is unconcerned.



Sunil Arora

4 years ago

Interestingly there are only 64 shareholders in a public limited company that is listed on the premier stock exchange like BSE and not a regional dormant SE. By definition listed companies need to be "WIDELY HELD". A public limited company that is unlisted is required to have at least 50 members. So 64 is barely above that number. But a listed company having only 64 shareholders? What is SEBI doing. Is there a cell that tracks things like these in SEBI.

It would appear that while SEBI is hell-bent on getting every listed company to have a minimum of 25% shareholding in public hand( rightly so ) and penalizing managements of companies that fail to comply ( Gillette being the latest ), there seems to no effort to discipline companies like Westland that find loopholes and exploit them to the limit.

I have tried to buy shares of this company for the past many months but have failed to get even a single one. When stocks can get locked in circuit breaker on trading of a single shares, it makes me wonder what people at BSE are doing?

Anil Agashe

4 years ago

Great article! Can a PIL be filed against SEBI for it's inaction on such instances which have been brought to its attention?


Sunil Arora

In Reply to Anil Agashe 4 years ago

I am sure an RTI application would do the trick and one does not need to go to the extent of filing a PIL

Sensex, Nifty yet to find direction: Monday Closing Report
A close above 5,850 on the Nifty may bring some gains while a close below 5,760 may lead to a sharp decline

The fall of the rupee to an all-time low against the dollar and weak global cues led the market lower today. A close above 5,850 on the Nifty may bring some gains while a close below 5,760 may lead to a sharp decline. The National Stock Exchange (NSE) recorded a volume of 52.09 crore shares and advance-decline ratio of 527:792.


The market opened sharply lower on weak global cues as the better-than-expected US jobs data re-ignited worries about the Federal Reserve scaling down its bond-buying programme. The fall of the rupee to a new all-time low in early trade also weighed on investor sentiment. The Chinese government’s proposal to reduce credit in a bid to force consolidation where overcapacity was seen, also drove the Asian markets lower in morning trade.


The Nifty opened 35 points lower at 5,833 and the Sensex started the day at 19,419, down 77 points from its previous close. Selling pressure in realty, metal, oil & gas, PSU and auto stocks led the indices lower as trade got underway.


The rupee fell by a huge 97 paise to breach the 61-mark to 61.19, a new all-time low, against the dollar in early trade on heavy demand for the American currency amid capital outflows. The local currency had plunged to 60.76 intraday on 26th June.


The sell-off led the benchmarks to their lows at around 10.00am. At the lows, the Nifty fell to 5,776 and the Sensex dropped to 19,186. The indices remained weak in remainder of the morning trade as the weak rupee pushed financial stocks lower.


The market recovered from its lows in noon trade on buying in select stocks and suspected intervention by Reserve Bank of India (RBI) to stabilise the rupee. The gains enabled the indices hit their highs in post-noon trade, though still in the red. The Nifty rose to 5,833 and the Sensex inched higher to 19,422 at their respective highs.


However, a minor bout of profit taking in the late session saw the market closing off the highs. The Nifty closed 56 points (0.96%) lower to 5,812 and the Sensex finished the session at 19,325, a cut of 171 points (0.88%).


Among the broader indices, the BSE Mid-cap index fell 0.06% and the BSE Small-cap index declined 0.38%.


The sectoral gainers were BSE Fast Moving Consumer Goods (up 0.72%); BSE TECk (up 0.43%); BSE IT (up 0.32%) and BSE Capital Goods (up 0.13%). The top losers were BSE Oil & Gas (down 1.94%); BSE PSU (down 1.90%); BSE Realty (down 1.79%); BSE Auto (down 1.51%) and BSE Metal (down 1.37%).


Out of the 30 stocks on the Sensex, nine stocks settled higher. The gainers were BHEL (up 2.32%); Wipro (up 1.50%); ITC (up 1.39%); Sun Pharmaceutical Industries (up 0.78%) and Infosys (up 0.70%). The main losers were ONGC (down 3.49%); HDFC (down 3.01%); Tata Motors (down 2.70%); GAIL India (down 2.63%) and Coal India (down 2.32%).


The top two A Group gainers on the BSE were—Reliance Communications (up 7.19%) and Reliance Power (up 5.24%).

The top two A Group losers on the BSE were—BPCL (down 5.64%) and Gitanjali Gems (down 5%).


The top two B Group gainers on the BSE were—Punjab Communications (up 19.93%) and Nagarjuna Oil Refinery (up 19.06%).

The top two B Group losers on the BSE were—Avance Tech (down 14.29%) and Sunitee Chemicals (down 12.50%).


Of the 50 stocks on the Nifty, 16 ended in the in the green. The major gainers were IndusInd Bank (up 3.98%); HCL Technologies (up 3.07%); BHEL (up 2.74%); Reliance Infrastructure (up 2.48%) and ACC (up 1.74%). The key losers were BPCL (down 5.56%); Jaiprakash Associates (down 4.13%); ONGC (down 3.84%); Mahindra & Mahindra (down 2.87%) and Tata Motors (down 2.73%).


Markets across Asia closed lower as investors believed that China’s plan to reduce credit would reduce credit growth by around 750 billion yuan ($122 billion). Worries of the US Fed tapering its stimulus also led the markets lower.


The Shanghai Composite tumbled 2.44%; the Hang Seng tanked 1.31%; the Jakarta Composite dropped 3.68%; the KLSE Composite declined 0.53%; the Nikkei 225 contracted 1.40%; the Straits Times fell 0.45%; the Seoul Composite declined 0.90% and the Taiwan Weighted settled 1.44% down.


At the time of writing, the key European markets were recouped from early losses and were in the positive. At the same time, the US stock futures were in the green, indicating a positive opening for US stocks later in the day.


Back home, foreign institutional investors were net sellers of shares totalling Rs15.70 crore on Friday whereas domestic institutional investors were net buyers of stocks amounting to Rs105.27 crore.


Apollo Hospitals Enterprises (AHEL) has said that it has received the board’s approval to invest Rs2,250 crore over the next three years. The investment will be funded through existing funds, incremental debt and internal accruals, according to the company's 2012-13 Annual Report. The stock declined 0.76% to Rs955.50 on the NSE.


Power transmission company Jyoti Structures has recently secured export orders worth Rs1,200 crore from countries including Kenya, Tanzania, Namibia, Nigeria, Philippines and Tajikistan. The orders pertain to engineering, tower testing and turn key construction of transmission lines and sub stations, as per the company’s filing with the exchanges. The stock gained 1.22% to settle at Rs20.75 on the NSE.


Infrastructure major Punj Lloyd has received a contract to construct a residential complex for the Delhi Police at an estimated cost of Rs1,300 crore at Dheerpur in the National Capital. The project, being developed on public-private partnership (PPP) mode, will have over 5,200 residential units, three schools and some commercial space, and will be maintained by Punj Lloyd for 25 years. The stock gained 1.08% to close at Rs32.65 on the NSE.



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