Ray Dalio and Jeff Gundlach—two of the most prominent hedge fund managers believe that the Indian economy and the stock market is on the precipice of a big fall
Two of the world's biggest and most successful hedge fund managers are very pessimistic on India and have cautioned investors that investing in India will be fraught with big risks. Jeff Gundlach, who manages a hedge fund DoubleLine Capital LP, believes that India’s currency is weak because of reliance on foreign capital and that he would rather not own Indian stocks. He also said that India’s stock markets look “very scary” because of high oil prices and rupee depreciation. He is short India amongst emerging market countries. Ray Dalio, another hedge fund who manages $150 billion in assets at Bridgewater Associates was quoted as saying that India should “prepare for the worst” since it has been one too vulnerable to foreign capital inflows which may now avoid emerging markets.
In his webcast titled “What If”, Gundlach said, “emerging markets currencies with the largest capital dependence on foreign capital flows to fund currency account gaps have been particularly hit.” As you can see one of his slides from his presentation, India’s short-term debt coverage ratio doesn’t look good. In fact, it has cratered below the average threshold limit. This essentially means that India has fewer reserves to meet short term debt obligations.
Dalio was quoted as saying, “We are going to have an emerging market crisis” particularly due to adverse balance of payments. He also said that emerging markets like India is not an attractive place to invest because of the unfavourable pricing and flows. He said that emerging markets have to confront the balance of payments problems and had little doubt about the tough times ahead for emerging markets. He pointed out that India’s stock market had been benefiting a lot, thanks to the quantitative easing, and unusual monetary policies adopted by the United States Federal Reserve and other developed countries like Japan. More dollars came to India as a result of this, boosting India’s stock markets. However, lack of economic reforms and political will, particularly in the infrastructure sector, meant that India solely depended on foreign capital to plug both current and fiscal gaps. This is a recipe for disaster. When foreign capital dries or is withdrawn (much of it due to a better economic recovery and US Federal Reserve decision to ‘taper’ monetary easing), India is left with little and, as a consequence, the rupee got clobbered.
The Economist believes that India has been complacent and failed to take advantage of incoming foreign capital to stimulate economic reforms. It said in a piece on 24 August, “India’s troubles are caused partly by global forces beyond its control. But they are also the consequence of a deadly complacency that has led the country to miss a great opportunity. To prevent a slide into crisis, the government needs first to stop making things worse”.
One would expect that a weaker rupee would help plug trade gaps as exports become more profitable. But it is not so because of economic mismanagement which has resulted in poor productivity and higher inflation which has eroded domestic competitiveness and resulted in higher input costs for some industries. As a result, the manufacturing sector which stands to benefit from a dearer rupee is not able to export competitively, although the information technology sector is expected to benefit. “India’s structural problems also make it harder for local exporters to cash in on the weak rupee,” says Bruce Einhorn and Kartik Goyal of Businessweek.
Soberlook.com, a financial blog, believes that India is headed for a full blown stagflation. It said, “At this stage, rising prices, sharply higher interest rates, and a loss of confidence within the business community will bring the economic growth to a standstill, potentially pushing the country into a full blown stagflation.”
India now pin their hopes on Raghuram Rajan, the smart economist from University of Chicago who had predicted the US economic crisis in 2005, to fix the economy. However, this will be a tall order. Gavin Davies, a writer for Financial Times blog, says, “It will not be easy for Rajan to restore credibility to monetary policy, but that is an essential task, without which all else will fail. Rajan believes that, with appropriate structural reforms, India can one day return to the heady 8%-10% growth rates of the 2000s. Maybe, but most of these reforms seem politically beyond reach at present. International investors should expect a painful period of tighter monetary policy and even slower growth before the crisis is over.”
The Delhi court, after hearing arguments of the prosecution, which sought death penalty for the four, and the defence lawyers, reserved its order on punishment till Friday
A fast-track Court in Delhi, which convicted four persons in the 16th December gang rape-cum-murder case, on Wednesday fixed 13th September for pronouncing the quantum of sentence to be awarded to them.
Additional sessions judge Yogesh Khanna reserved the order on punishment after hearing arguments of the prosecution, which sought death penalty for the four, and the defence lawyers.
The Delhi Police sought death penalty for the four for brutal gang rape and cold-blooded murder of the 23-year-old girl.
Advancing arguments on quantum of sentence, special public prosecutor Dayan Krishnan said the death sentence should be awarded to the four convicts — Mukesh (26), Vinay Sharma (20), Pawan Gupta (19) and Akshay Thakur (28) — as the case falls in the category of "rarest of rare" cases.
The defence lawyers, however, sought a lenient punishment for the convicts, saying life imprisonment in such a case is a rule while death penalty is an exception.
During the arguments, the prosecutor told the court that the convicts do not deserve any mercy, as they killed the helpless girl who kept on pleading for mercy.
"The crime is not only grotesque and diabolic in nature but the barbaric behaviour of the convicts was of the highest kind. Maximum sentence has to be given as the court should see that they have raped and killed a helpless girl, even as she pleaded for her life," he said.
He said people at large are watching this case and if the convicts are awarded a lighter punishment, the public will lose faith in the judicial system.
"This is an extreme case of depravity and sexual assault of a young girl, who could not survive after their gruesome attack and gang rape. The act to damage the girl's intestines intentionally leaves no scope of sympathy," the prosecutor argued.
Hindustan Unilever has products in soaps, detergents and skincare, and in discretionary segments like packaged foods and water purifiers. It will be affected adversely by the slowdown in the consumer sector, says SBICAP Securities
With the economic growth tapering down to 4% for India, slowdown has seeped into the premium/ discretionary end of consumer sector. SBICAP Securities in its research note estimates that overall market volumes are down by more than 1,000 bps in the last 12 months in personal products. Last year itself, the market segment for food products saw a fall in volumes.
Hindustan Unilever is the largest FMCG player in India and it will clock a CAGR of 6.5% in EPS (earnings per share) over FY13-15. This is much lower than the CAGR of 13% year-on-year in FY07-13. It has products in soaps, detergents and skincare, and in discretionary segments products like packaged foods and water purifiers. It will be affected adversely by the slowdown in the consumer sector, says SBICAP Securities in its research note.
While evaluating the recent quarterly performance of Hindustan Unilever, the research note points out that value growth declined due to 500bps reduction in volume growth over the last one year due to pricing anniversary effect in the detergents category.
In terms of stock market performance of the Hindustan Unilever share, the research note says that the share is trading at 37% premium to the sector compared to the 25% premium observed historically. SBICAP Securities has valued the stock at Rs600 and given a ‘SELL’ rating on the stock.
However, for major players in the consumer sector, ad spends are likely to be on the higher side, and market shares are likely to be maintained due to fewer new product launches.