Category

India

Brief India: Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows and more

By | Daily Briefs, India

In this briefing:

  1. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

1. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

Cbfgdp

  • World (gross) cross-border flows have rebounded strongly
  • Global Liquidity and World Business cycle are increasing driven by cross-border flows
  • Strong cross-border flows drive outperformance of cyclicals and non-US markets

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief India: Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows and more

By | Daily Briefs, India

In this briefing:

  1. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows
  2. Indusind Bank: One More Disturbing Lapse of Judgment by the “Banker of the Year”

1. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

Cbfgdp

  • World (gross) cross-border flows have rebounded strongly
  • Global Liquidity and World Business cycle are increasing driven by cross-border flows
  • Strong cross-border flows drive outperformance of cyclicals and non-US markets

2. Indusind Bank: One More Disturbing Lapse of Judgment by the “Banker of the Year”

Indusind%20sprit%20charges

Romesh Sobti, the CEO of Indusind Bank, was recently crowned ‘banker of the year’ by a fawning business media, despite reporting two consecutive years of fudged accounts (FY2016 and FY2017) and putting nearly 8% of the bank’s capital at risk in an ill-advised, unsecured loan to the insolvent IL&FS. We find that the lauded banker is also grappling with a Rs 5 bn loan to the liquidity-constrained investment company of the founder of the Essel media group (flagship, Zee Entertainment Enterprises). It remains a mystery why Indusind Bank gave such a high-risk loan in end-April 2018 and secured it against an illiquid, optionally convertible security of an unlisted associate company. To date the loan appears to barely retain its ‘standard’ classification, but the investment companies of the Zee founders have brought considerable grief to the mutual fund industry, exposing their poor credit appraisal and risk management policies. If the Zee founders are unable to divest assets and sell part of their holding in the flagship listed company, Indusind Bank shareholders will share the grief of the investors in debt mutual funds who had subscribed to the ill-fated paper issued by companies of the Zee founders. It is time the banking regulator also closely monitored the credit and risk systems at Indusind Bank. The coveted laurel gracing the head of Indusind Bank’s CEO may turn out to be a crown of thorns for stakeholders of the bank, exposing once again the credit appraisal and risk mitigation policies in this bank.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief India: Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows and more

By | Daily Briefs, India

In this briefing:

  1. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows
  2. Indusind Bank: One More Disturbing Lapse of Judgment by the “Banker of the Year”
  3. IKEA in India: Decoding the Case of the Curious Shopper & Slow Offtake for High-Value Items

1. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

Cbfgdp

  • World (gross) cross-border flows have rebounded strongly
  • Global Liquidity and World Business cycle are increasing driven by cross-border flows
  • Strong cross-border flows drive outperformance of cyclicals and non-US markets

2. Indusind Bank: One More Disturbing Lapse of Judgment by the “Banker of the Year”

Indusind%20sprit%20charges

Romesh Sobti, the CEO of Indusind Bank, was recently crowned ‘banker of the year’ by a fawning business media, despite reporting two consecutive years of fudged accounts (FY2016 and FY2017) and putting nearly 8% of the bank’s capital at risk in an ill-advised, unsecured loan to the insolvent IL&FS. We find that the lauded banker is also grappling with a Rs 5 bn loan to the liquidity-constrained investment company of the founder of the Essel media group (flagship, Zee Entertainment Enterprises). It remains a mystery why Indusind Bank gave such a high-risk loan in end-April 2018 and secured it against an illiquid, optionally convertible security of an unlisted associate company. To date the loan appears to barely retain its ‘standard’ classification, but the investment companies of the Zee founders have brought considerable grief to the mutual fund industry, exposing their poor credit appraisal and risk management policies. If the Zee founders are unable to divest assets and sell part of their holding in the flagship listed company, Indusind Bank shareholders will share the grief of the investors in debt mutual funds who had subscribed to the ill-fated paper issued by companies of the Zee founders. It is time the banking regulator also closely monitored the credit and risk systems at Indusind Bank. The coveted laurel gracing the head of Indusind Bank’s CEO may turn out to be a crown of thorns for stakeholders of the bank, exposing once again the credit appraisal and risk mitigation policies in this bank.

3. IKEA in India: Decoding the Case of the Curious Shopper & Slow Offtake for High-Value Items

Ikea%20top%20sellers

In a recently published interview, IKEA’s chief executive confirmed that offtake in furniture has been slow at its only store in India at Hyderabad and sales are mostly limited to low-value items and mattresses. Overwhelming crowds had thronged the store for weeks post its opening in August 2018 ( Consumption Diary: As IKEA Storms India, GSK Wants a Way Out; Actionable Insights from Smartkarma ), suggestive of India’s large pent up demand for quality affordable home products. However, during our ground check in the year-end holiday season, we were surprised to note that while visitors came in large numbers, shoppers were sparse in furniture segment and billing counter was nearly empty. Apart from the kitchen supplies area and a good turnout at the food section, shopping seemed lacklustre. Why isn’t IKEA’s attractive price-product proposition able to convert curious walk-in visitors to loyal customers?

In the detailed note below, we look into possible reasons why IKEA’s furniture sales arent commensurate with high footfalls, based on the store visit and our analysis of Indian shopper’s preferences/constraints with respect to home products purchase. We believe many shoppers are constrained by access to purchase than affordability, given lack of credit options. We also compare IKEA with existing large home products retailers in India and look at the scope of IKEA’s opportunity/challenges as it expands presence across geographies and formats in India.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief India: GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal and more

By | Daily Briefs, India

In this briefing:

  1. GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal
  2. The Global Recovery Narrative Crumbles
  3. Bitcoin, Revisited
  4. Landslide Triumph for Modi Prepares the Ground for Economic Transformation
  5. The Fragile Urban Consumer

1. GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal

Highlights15

Copley Fund Research analyse the holdings of long-only equity funds.  This analysis is taken from our GEM research product, covering 189 global emerging market funds with a combined AUM of $350bn. 

In this month’s Positioning Monthly, we highlight an increasing exposure towards Indonesian Financial stocks, with Bank Rakyat Indonesia Perser (BBRI IJ) and Bank Central Asia (BBCA IJ) the key overweight positions.  We analyse holdings in the food and beverages industry groups as ownership reaches peak levels in both.  Finally, we explore the sharp reversal in Lenovo (992 HK) sentiment as more and more GEM funds buy into the stock.

2. The Global Recovery Narrative Crumbles

3%20 %20copy

The US equity market was running with an optimistic assessment that there is a Trump and Fed put, that a trade deal and Chinese policy stimulus would generate a recovery in the global economy and the US economy was largely immune to a slowdown in activity abroad. However, the tariffs have been increased, trade talks have stalled, and the US has rolled out bans on Chinese tech companies.  The evidence grows that there is a structural rift in US-China trade relations. The rebound in Chinese economic activity in March was not backed up by data in other Asian exporter nations or Europe through April.  Chinese activity data slumped again in April, and the latest PMI data in the Eurozone, Japan and the USA for May are weak. Oil and copper prices have turned lower, suggesting that industrial activity remains weak.  We continue to see downside risk for still elevated US equities.  The strength in the USD to date is contributing to downward pressure on US equities.  The gains in the USD may have become over-extended.  China may pursue a more stable CNY for a period and lower US yields should support safe haven currencies, JPY, CHF and gold.

3. Bitcoin, Revisited

Bitcoin volatility ratio of bitcoin volatility to stocks volatility chartbuilder 3

Bitcoin and the block chain were created just over ten years ago, as a means to create peer to peer transactions without the need to use financial institutions to process the payments. 

However, frequent hacks of Bitcoin exchanges, in addition to the significant past fluctuations of Bitcoin prices, have put mainstream usage off and slowed the adoption of the cryptocurrency.

Is this about to change now?

4. Landslide Triumph for Modi Prepares the Ground for Economic Transformation

Prime Minister Narendra Modi has been re-elected in a landslide victory, with his BJP party leading in 300 constituencies (up from 282 in 2014) in the 543-seat Lok Sabha, giving the BJP a robust majority. The BJP-led National Democratic Alliance (NDA, despite losing a few of its 2014 allies) leads in 345 seats. And, unlike in 2014, the NDA will have a majority in the Rajya Sabha (upper house, which has important legislative clout on non-fiscal issues) with the help of a couple of reliable non-NDA parties (BJD and YSRC) who have also done well in their states. India’s next-largest party, Congress, is leading in merely 50 seats (less than a tenth of the Lok Sabha seats!).  

The election result is a massive shot in the arm for PM Modi, and puts crucial wind in his sails. The NDA won 48% of the national vote, more than the Congress (or any alliance led by it) has won in any election (apart from the 1984 “sympathy wave” after Indira Gandhi’s assassination, when it won 48%). The BJP saw a huge increase in its seat count in West Bengal and Odisha, retained its hold on north, central and western India, and gained in Karnataka and Telangana in the south. Anti-incumbency is usually one of the enduring features of Indian elections; but Modi has secured a nearly 10 percentage point swing for the NDA (and 7pp for the BJP), easily the biggest pro-incumbent swing that any Indian prime minister has ever received.   

Having made the hard decisions of painstakingly reforming the banking system and bankruptcy code, bringing inflation down to well below 3% on a sustainable basis, stabilising the rupee amid global instability, unifying India as a national market through the GST (which will now be rationalised further), universalised access to banks (thereby enabling government benefits to be directly delivered to the poor without leakages), Modi will now concentrate on further transformative change. In particular, labour market reform (reducing protections for “organized” labour in order to increase employment, while introducing basic protections for the unorganized worker, so that she has a more civilized existence), rational changes to the land laws, and better-honed incentives for manufacturing will transform India’s economic prospects over the next 5 years. We are Maximum Bullish on India, which will see 9% annual real GDP growth over the next 5 years — and over 10% in the 2022-24 period after these reforms are enacted. India’s time has come!  

5. The Fragile Urban Consumer

Rbi%20consumer%20sentiment

We visit JodhpurPhalodi and Jaipur in the state of Rajasthan in an attempt to understand current consumer sentiment and reasons for the slow down in consumption. While the takeaways are state specific, the issues highlighted would be applicable to understand the consumer sentiment across the country, impacting the broader Indian Consumption Story.  We argue that the pain is shifting from rural to the urban consumer.  Our limited regional checks are suggesting cracks being developed and might break the consumer story if the business environment and consumer sentiment does not substantially change over the next six to nine months. 

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief India: Indusind Bank: One More Disturbing Lapse of Judgment by the “Banker of the Year” and more

By | Daily Briefs, India

In this briefing:

  1. Indusind Bank: One More Disturbing Lapse of Judgment by the “Banker of the Year”
  2. IKEA in India: Decoding the Case of the Curious Shopper & Slow Offtake for High-Value Items
  3. This Week in Blockchain & Cryptos: MimbleWimble – A Friend or Foe to Bitcoin?

1. Indusind Bank: One More Disturbing Lapse of Judgment by the “Banker of the Year”

Indusind%20sprit%20charges

Romesh Sobti, the CEO of Indusind Bank, was recently crowned ‘banker of the year’ by a fawning business media, despite reporting two consecutive years of fudged accounts (FY2016 and FY2017) and putting nearly 8% of the bank’s capital at risk in an ill-advised, unsecured loan to the insolvent IL&FS. We find that the lauded banker is also grappling with a Rs 5 bn loan to the liquidity-constrained investment company of the founder of the Essel media group (flagship, Zee Entertainment Enterprises). It remains a mystery why Indusind Bank gave such a high-risk loan in end-April 2018 and secured it against an illiquid, optionally convertible security of an unlisted associate company. To date the loan appears to barely retain its ‘standard’ classification, but the investment companies of the Zee founders have brought considerable grief to the mutual fund industry, exposing their poor credit appraisal and risk management policies. If the Zee founders are unable to divest assets and sell part of their holding in the flagship listed company, Indusind Bank shareholders will share the grief of the investors in debt mutual funds who had subscribed to the ill-fated paper issued by companies of the Zee founders. It is time the banking regulator also closely monitored the credit and risk systems at Indusind Bank. The coveted laurel gracing the head of Indusind Bank’s CEO may turn out to be a crown of thorns for stakeholders of the bank, exposing once again the credit appraisal and risk mitigation policies in this bank.

2. IKEA in India: Decoding the Case of the Curious Shopper & Slow Offtake for High-Value Items

Ikea%20top%20sellers

In a recently published interview, IKEA’s chief executive confirmed that offtake in furniture has been slow at its only store in India at Hyderabad and sales are mostly limited to low-value items and mattresses. Overwhelming crowds had thronged the store for weeks post its opening in August 2018 ( Consumption Diary: As IKEA Storms India, GSK Wants a Way Out; Actionable Insights from Smartkarma ), suggestive of India’s large pent up demand for quality affordable home products. However, during our ground check in the year-end holiday season, we were surprised to note that while visitors came in large numbers, shoppers were sparse in furniture segment and billing counter was nearly empty. Apart from the kitchen supplies area and a good turnout at the food section, shopping seemed lacklustre. Why isn’t IKEA’s attractive price-product proposition able to convert curious walk-in visitors to loyal customers?

In the detailed note below, we look into possible reasons why IKEA’s furniture sales arent commensurate with high footfalls, based on the store visit and our analysis of Indian shopper’s preferences/constraints with respect to home products purchase. We believe many shoppers are constrained by access to purchase than affordability, given lack of credit options. We also compare IKEA with existing large home products retailers in India and look at the scope of IKEA’s opportunity/challenges as it expands presence across geographies and formats in India.

3. This Week in Blockchain & Cryptos: MimbleWimble – A Friend or Foe to Bitcoin?

  • MimbleWimble is a powerful, positive technological development in the crypto space. There is an increasing possibility that MimbleWimble protocol may become a sidechain to Bitcoin in the future. The launch of Beam and Grin cryptocurrencies in January 2019 is likely to be just the start of many more MimbleWimble protocol based cryptos that may gain greater market acceptance. From a fundamental perspective, as an increasing number of people realize the benefits of using MimbleWimble alongside Bitcoin, this could be one of the reasons helping to drive Bitcoin price higher this year. 
  • MimbleWimble is a privacy-oriented blockchain protocol which attempts to make transactions very anonymous, while still allowing for external verification on a highly scalable basis and maintaining quick verification.  

  • MimbleWimble has its share of weaknesses including potential government crackdown, slow adoption of MimbleWimble based cryptos by major exchanges, and lack of scripting language.
  • However, the clear superiority in anonymity, scalability, and fungibility of MimbleWimble may outweigh its negatives. All in all, MimbleWimble is one the key technological trends that will impact the cryptocurrencies/blockchain sector this year and it is worthwhile paying close attention on this technology. 

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief India: Indusind Bank: One More Disturbing Lapse of Judgment by the “Banker of the Year” and more

By | Daily Briefs, India

In this briefing:

  1. Indusind Bank: One More Disturbing Lapse of Judgment by the “Banker of the Year”
  2. IKEA in India: Decoding the Case of the Curious Shopper & Slow Offtake for High-Value Items
  3. This Week in Blockchain & Cryptos: MimbleWimble – A Friend or Foe to Bitcoin?
  4. Manifestonomics: Effect of Promises Made by Congress & BJP

1. Indusind Bank: One More Disturbing Lapse of Judgment by the “Banker of the Year”

Indusind%20sprit%20charges

Romesh Sobti, the CEO of Indusind Bank, was recently crowned ‘banker of the year’ by a fawning business media, despite reporting two consecutive years of fudged accounts (FY2016 and FY2017) and putting nearly 8% of the bank’s capital at risk in an ill-advised, unsecured loan to the insolvent IL&FS. We find that the lauded banker is also grappling with a Rs 5 bn loan to the liquidity-constrained investment company of the founder of the Essel media group (flagship, Zee Entertainment Enterprises). It remains a mystery why Indusind Bank gave such a high-risk loan in end-April 2018 and secured it against an illiquid, optionally convertible security of an unlisted associate company. To date the loan appears to barely retain its ‘standard’ classification, but the investment companies of the Zee founders have brought considerable grief to the mutual fund industry, exposing their poor credit appraisal and risk management policies. If the Zee founders are unable to divest assets and sell part of their holding in the flagship listed company, Indusind Bank shareholders will share the grief of the investors in debt mutual funds who had subscribed to the ill-fated paper issued by companies of the Zee founders. It is time the banking regulator also closely monitored the credit and risk systems at Indusind Bank. The coveted laurel gracing the head of Indusind Bank’s CEO may turn out to be a crown of thorns for stakeholders of the bank, exposing once again the credit appraisal and risk mitigation policies in this bank.

2. IKEA in India: Decoding the Case of the Curious Shopper & Slow Offtake for High-Value Items

Ikea%20top%20sellers

In a recently published interview, IKEA’s chief executive confirmed that offtake in furniture has been slow at its only store in India at Hyderabad and sales are mostly limited to low-value items and mattresses. Overwhelming crowds had thronged the store for weeks post its opening in August 2018 ( Consumption Diary: As IKEA Storms India, GSK Wants a Way Out; Actionable Insights from Smartkarma ), suggestive of India’s large pent up demand for quality affordable home products. However, during our ground check in the year-end holiday season, we were surprised to note that while visitors came in large numbers, shoppers were sparse in furniture segment and billing counter was nearly empty. Apart from the kitchen supplies area and a good turnout at the food section, shopping seemed lacklustre. Why isn’t IKEA’s attractive price-product proposition able to convert curious walk-in visitors to loyal customers?

In the detailed note below, we look into possible reasons why IKEA’s furniture sales arent commensurate with high footfalls, based on the store visit and our analysis of Indian shopper’s preferences/constraints with respect to home products purchase. We believe many shoppers are constrained by access to purchase than affordability, given lack of credit options. We also compare IKEA with existing large home products retailers in India and look at the scope of IKEA’s opportunity/challenges as it expands presence across geographies and formats in India.

3. This Week in Blockchain & Cryptos: MimbleWimble – A Friend or Foe to Bitcoin?

  • MimbleWimble is a powerful, positive technological development in the crypto space. There is an increasing possibility that MimbleWimble protocol may become a sidechain to Bitcoin in the future. The launch of Beam and Grin cryptocurrencies in January 2019 is likely to be just the start of many more MimbleWimble protocol based cryptos that may gain greater market acceptance. From a fundamental perspective, as an increasing number of people realize the benefits of using MimbleWimble alongside Bitcoin, this could be one of the reasons helping to drive Bitcoin price higher this year. 
  • MimbleWimble is a privacy-oriented blockchain protocol which attempts to make transactions very anonymous, while still allowing for external verification on a highly scalable basis and maintaining quick verification.  

  • MimbleWimble has its share of weaknesses including potential government crackdown, slow adoption of MimbleWimble based cryptos by major exchanges, and lack of scripting language.
  • However, the clear superiority in anonymity, scalability, and fungibility of MimbleWimble may outweigh its negatives. All in all, MimbleWimble is one the key technological trends that will impact the cryptocurrencies/blockchain sector this year and it is worthwhile paying close attention on this technology. 

4. Manifestonomics: Effect of Promises Made by Congress & BJP

Rupee%20goes

India is going through the biggest democracy festival i.e. the General Elections. Both the national parties, ruling & opposition, have made big promises through there manifestoes. While the Congress manifesto, titled “Congress Will Deliver” was propelled on April 2, the BJP manifesto titled “Sankalpit Bharat, Sashakt Bharat” was revealed on April 8. 

 The two parties have used two different approaches to define their manifestoes and the difference can be seen in their priorities and direction. We looked at the two manifestoes. The Congress manifesto is focused on financial modifications while the BJP has given prime importance to national security. We have tried to analyze the economic impact on the government’s health if these parties fulfill their commitments.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief India: Semiconductor Revenues Collapsing, As Anticipated and more

By | Daily Briefs, India

In this briefing:

  1. Semiconductor Revenues Collapsing, As Anticipated

1. Semiconductor Revenues Collapsing, As Anticipated

2019 04 01%20wsts%20monthly%20revenues

On April 1 the World Semiconductor Trade Statistics were released illustrating, as we anticipated, that a full-blown collapse is underway.  This Insight shows how consistently the current situation follows past trends.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief India: The Global Recovery Narrative Crumbles and more

By | Daily Briefs, India

In this briefing:

  1. The Global Recovery Narrative Crumbles
  2. Bitcoin, Revisited
  3. Landslide Triumph for Modi Prepares the Ground for Economic Transformation
  4. The Fragile Urban Consumer
  5. Yes Bank’s Hike in Deferred Tax Assets: Short-Sighted Policy

1. The Global Recovery Narrative Crumbles

4%20 %20copy

The US equity market was running with an optimistic assessment that there is a Trump and Fed put, that a trade deal and Chinese policy stimulus would generate a recovery in the global economy and the US economy was largely immune to a slowdown in activity abroad. However, the tariffs have been increased, trade talks have stalled, and the US has rolled out bans on Chinese tech companies.  The evidence grows that there is a structural rift in US-China trade relations. The rebound in Chinese economic activity in March was not backed up by data in other Asian exporter nations or Europe through April.  Chinese activity data slumped again in April, and the latest PMI data in the Eurozone, Japan and the USA for May are weak. Oil and copper prices have turned lower, suggesting that industrial activity remains weak.  We continue to see downside risk for still elevated US equities.  The strength in the USD to date is contributing to downward pressure on US equities.  The gains in the USD may have become over-extended.  China may pursue a more stable CNY for a period and lower US yields should support safe haven currencies, JPY, CHF and gold.

2. Bitcoin, Revisited

Bitcoin volatility ratio of bitcoin volatility to stocks volatility chartbuilder 3

Bitcoin and the block chain were created just over ten years ago, as a means to create peer to peer transactions without the need to use financial institutions to process the payments. 

However, frequent hacks of Bitcoin exchanges, in addition to the significant past fluctuations of Bitcoin prices, have put mainstream usage off and slowed the adoption of the cryptocurrency.

Is this about to change now?

3. Landslide Triumph for Modi Prepares the Ground for Economic Transformation

Prime Minister Narendra Modi has been re-elected in a landslide victory, with his BJP party leading in 300 constituencies (up from 282 in 2014) in the 543-seat Lok Sabha, giving the BJP a robust majority. The BJP-led National Democratic Alliance (NDA, despite losing a few of its 2014 allies) leads in 345 seats. And, unlike in 2014, the NDA will have a majority in the Rajya Sabha (upper house, which has important legislative clout on non-fiscal issues) with the help of a couple of reliable non-NDA parties (BJD and YSRC) who have also done well in their states. India’s next-largest party, Congress, is leading in merely 50 seats (less than a tenth of the Lok Sabha seats!).  

The election result is a massive shot in the arm for PM Modi, and puts crucial wind in his sails. The NDA won 48% of the national vote, more than the Congress (or any alliance led by it) has won in any election (apart from the 1984 “sympathy wave” after Indira Gandhi’s assassination, when it won 48%). The BJP saw a huge increase in its seat count in West Bengal and Odisha, retained its hold on north, central and western India, and gained in Karnataka and Telangana in the south. Anti-incumbency is usually one of the enduring features of Indian elections; but Modi has secured a nearly 10 percentage point swing for the NDA (and 7pp for the BJP), easily the biggest pro-incumbent swing that any Indian prime minister has ever received.   

Having made the hard decisions of painstakingly reforming the banking system and bankruptcy code, bringing inflation down to well below 3% on a sustainable basis, stabilising the rupee amid global instability, unifying India as a national market through the GST (which will now be rationalised further), universalised access to banks (thereby enabling government benefits to be directly delivered to the poor without leakages), Modi will now concentrate on further transformative change. In particular, labour market reform (reducing protections for “organized” labour in order to increase employment, while introducing basic protections for the unorganized worker, so that she has a more civilized existence), rational changes to the land laws, and better-honed incentives for manufacturing will transform India’s economic prospects over the next 5 years. We are Maximum Bullish on India, which will see 9% annual real GDP growth over the next 5 years — and over 10% in the 2022-24 period after these reforms are enacted. India’s time has come!  

4. The Fragile Urban Consumer

Rbi%20consumer%20sentiment

We visit JodhpurPhalodi and Jaipur in the state of Rajasthan in an attempt to understand current consumer sentiment and reasons for the slow down in consumption. While the takeaways are state specific, the issues highlighted would be applicable to understand the consumer sentiment across the country, impacting the broader Indian Consumption Story.  We argue that the pain is shifting from rural to the urban consumer.  Our limited regional checks are suggesting cracks being developed and might break the consumer story if the business environment and consumer sentiment does not substantially change over the next six to nine months. 

5. Yes Bank’s Hike in Deferred Tax Assets: Short-Sighted Policy

Yes%20dta%20fy19

Yes Bank’s loss in 4QFY19 would have been much higher, by Rs 16.6 bn, and its annual profit significantly lower, had it not been for the increase in the net deferred tax asset (DTA) of the same amount. The huge increase in the DTA partly offset the large provision the bank made for standard and non-performing  assets. Although such  accounting is permissible under regulatory norms, it inflates current profits, and depresses future profits. In the opinion of this writer, it is not a prudent practice. The management probably were of the view that reporting a larger loss than what they reported in the 4QFY19 would unnerve shareholders and depositors; as it is the stock market immediately reacted to the results with a 29% fall in the share price. The bank, though, has merely deferred the negative impact, and shareholders should be enlightened about the accounting treatment. The saving grace is that the new CEO is cleaning up the bank and its bad assets will become more transparent than in the past.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief India: Bitcoin, Revisited and more

By | Daily Briefs, India

In this briefing:

  1. Bitcoin, Revisited
  2. Landslide Triumph for Modi Prepares the Ground for Economic Transformation
  3. The Fragile Urban Consumer
  4. Yes Bank’s Hike in Deferred Tax Assets: Short-Sighted Policy
  5. High Stakes Huawei Gamble a Weight on US and Global Equities

1. Bitcoin, Revisited

Screenshot%202019 05 23%20at%2020.26.51

Bitcoin and the block chain were created just over ten years ago, as a means to create peer to peer transactions without the need to use financial institutions to process the payments. 

However, frequent hacks of Bitcoin exchanges, in addition to the significant past fluctuations of Bitcoin prices, have put mainstream usage off and slowed the adoption of the cryptocurrency.

Is this about to change now?

2. Landslide Triumph for Modi Prepares the Ground for Economic Transformation

Prime Minister Narendra Modi has been re-elected in a landslide victory, with his BJP party leading in 300 constituencies (up from 282 in 2014) in the 543-seat Lok Sabha, giving the BJP a robust majority. The BJP-led National Democratic Alliance (NDA, despite losing a few of its 2014 allies) leads in 345 seats. And, unlike in 2014, the NDA will have a majority in the Rajya Sabha (upper house, which has important legislative clout on non-fiscal issues) with the help of a couple of reliable non-NDA parties (BJD and YSRC) who have also done well in their states. India’s next-largest party, Congress, is leading in merely 50 seats (less than a tenth of the Lok Sabha seats!).  

The election result is a massive shot in the arm for PM Modi, and puts crucial wind in his sails. The NDA won 48% of the national vote, more than the Congress (or any alliance led by it) has won in any election (apart from the 1984 “sympathy wave” after Indira Gandhi’s assassination, when it won 48%). The BJP saw a huge increase in its seat count in West Bengal and Odisha, retained its hold on north, central and western India, and gained in Karnataka and Telangana in the south. Anti-incumbency is usually one of the enduring features of Indian elections; but Modi has secured a nearly 10 percentage point swing for the NDA (and 7pp for the BJP), easily the biggest pro-incumbent swing that any Indian prime minister has ever received.   

Having made the hard decisions of painstakingly reforming the banking system and bankruptcy code, bringing inflation down to well below 3% on a sustainable basis, stabilising the rupee amid global instability, unifying India as a national market through the GST (which will now be rationalised further), universalised access to banks (thereby enabling government benefits to be directly delivered to the poor without leakages), Modi will now concentrate on further transformative change. In particular, labour market reform (reducing protections for “organized” labour in order to increase employment, while introducing basic protections for the unorganized worker, so that she has a more civilized existence), rational changes to the land laws, and better-honed incentives for manufacturing will transform India’s economic prospects over the next 5 years. We are Maximum Bullish on India, which will see 9% annual real GDP growth over the next 5 years — and over 10% in the 2022-24 period after these reforms are enacted. India’s time has come!  

3. The Fragile Urban Consumer

Rbi%20consumer%20sentiment

We visit JodhpurPhalodi and Jaipur in the state of Rajasthan in an attempt to understand current consumer sentiment and reasons for the slow down in consumption. While the takeaways are state specific, the issues highlighted would be applicable to understand the consumer sentiment across the country, impacting the broader Indian Consumption Story.  We argue that the pain is shifting from rural to the urban consumer.  Our limited regional checks are suggesting cracks being developed and might break the consumer story if the business environment and consumer sentiment does not substantially change over the next six to nine months. 

4. Yes Bank’s Hike in Deferred Tax Assets: Short-Sighted Policy

Yes%20dta%20fy19

Yes Bank’s loss in 4QFY19 would have been much higher, by Rs 16.6 bn, and its annual profit significantly lower, had it not been for the increase in the net deferred tax asset (DTA) of the same amount. The huge increase in the DTA partly offset the large provision the bank made for standard and non-performing  assets. Although such  accounting is permissible under regulatory norms, it inflates current profits, and depresses future profits. In the opinion of this writer, it is not a prudent practice. The management probably were of the view that reporting a larger loss than what they reported in the 4QFY19 would unnerve shareholders and depositors; as it is the stock market immediately reacted to the results with a 29% fall in the share price. The bank, though, has merely deferred the negative impact, and shareholders should be enlightened about the accounting treatment. The saving grace is that the new CEO is cleaning up the bank and its bad assets will become more transparent than in the past.

5. High Stakes Huawei Gamble a Weight on US and Global Equities

1%20 %20copy

The Huawei Entity Listing appears to be a high stakes gamble by the US administration to counter the rise in Chinese economic power in an industry that is critical to the global economy.  It is evidence that the broader economic and trade dispute will be hard to resolve, and makes it harder for China and the US to resume trade negotiations.  This suggests that punitive tariffs may remain in place for much longer than expected and indeed may be expanded further.  Global trade and manufacturing activity appears to have been undermined by the trade dispute, and hopes of a recovery later in the year may continue to fade.  China is likely to retaliate; weakening the outlook for US companies.  It may also weaponise its exchange rate, allowing it to weaken further, adding to strength in the USD, dampening US equities. The market might assume that the Fed will cut rates to support the equity market, but this is unlikely until US financial conditions deteriorate further.  As such, we see a high risk of a weaker global equity market, and under-performance in EM and commodity currencies against safe havens, gold and JPY.

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Brief India: Landslide Triumph for Modi Prepares the Ground for Economic Transformation and more

By | Daily Briefs, India

In this briefing:

  1. Landslide Triumph for Modi Prepares the Ground for Economic Transformation
  2. The Fragile Urban Consumer
  3. Yes Bank’s Hike in Deferred Tax Assets: Short-Sighted Policy
  4. High Stakes Huawei Gamble a Weight on US and Global Equities
  5. Global Banking Trends: Trusting the Signals

1. Landslide Triumph for Modi Prepares the Ground for Economic Transformation

Prime Minister Narendra Modi has been re-elected in a landslide victory, with his BJP party leading in 300 constituencies (up from 282 in 2014) in the 543-seat Lok Sabha, giving the BJP a robust majority. The BJP-led National Democratic Alliance (NDA, despite losing a few of its 2014 allies) leads in 345 seats. And, unlike in 2014, the NDA will have a majority in the Rajya Sabha (upper house, which has important legislative clout on non-fiscal issues) with the help of a couple of reliable non-NDA parties (BJD and YSRC) who have also done well in their states. India’s next-largest party, Congress, is leading in merely 50 seats (less than a tenth of the Lok Sabha seats!).  

The election result is a massive shot in the arm for PM Modi, and puts crucial wind in his sails. The NDA won 48% of the national vote, more than the Congress (or any alliance led by it) has won in any election (apart from the 1984 “sympathy wave” after Indira Gandhi’s assassination, when it won 48%). The BJP saw a huge increase in its seat count in West Bengal and Odisha, retained its hold on north, central and western India, and gained in Karnataka and Telangana in the south. Anti-incumbency is usually one of the enduring features of Indian elections; but Modi has secured a nearly 10 percentage point swing for the NDA (and 7pp for the BJP), easily the biggest pro-incumbent swing that any Indian prime minister has ever received.   

Having made the hard decisions of painstakingly reforming the banking system and bankruptcy code, bringing inflation down to well below 3% on a sustainable basis, stabilising the rupee amid global instability, unifying India as a national market through the GST (which will now be rationalised further), universalised access to banks (thereby enabling government benefits to be directly delivered to the poor without leakages), Modi will now concentrate on further transformative change. In particular, labour market reform (reducing protections for “organized” labour in order to increase employment, while introducing basic protections for the unorganized worker, so that she has a more civilized existence), rational changes to the land laws, and better-honed incentives for manufacturing will transform India’s economic prospects over the next 5 years. We are Maximum Bullish on India, which will see 9% annual real GDP growth over the next 5 years — and over 10% in the 2022-24 period after these reforms are enacted. India’s time has come!  

2. The Fragile Urban Consumer

Rbi%20consumer%20sentiment

We visit JodhpurPhalodi and Jaipur in the state of Rajasthan in an attempt to understand current consumer sentiment and reasons for the slow down in consumption. While the takeaways are state specific, the issues highlighted would be applicable to understand the consumer sentiment across the country, impacting the broader Indian Consumption Story.  We argue that the pain is shifting from rural to the urban consumer.  Our limited regional checks are suggesting cracks being developed and might break the consumer story if the business environment and consumer sentiment does not substantially change over the next six to nine months. 

3. Yes Bank’s Hike in Deferred Tax Assets: Short-Sighted Policy

Yes%20dta%20fy19

Yes Bank’s loss in 4QFY19 would have been much higher, by Rs 16.6 bn, and its annual profit significantly lower, had it not been for the increase in the net deferred tax asset (DTA) of the same amount. The huge increase in the DTA partly offset the large provision the bank made for standard and non-performing  assets. Although such  accounting is permissible under regulatory norms, it inflates current profits, and depresses future profits. In the opinion of this writer, it is not a prudent practice. The management probably were of the view that reporting a larger loss than what they reported in the 4QFY19 would unnerve shareholders and depositors; as it is the stock market immediately reacted to the results with a 29% fall in the share price. The bank, though, has merely deferred the negative impact, and shareholders should be enlightened about the accounting treatment. The saving grace is that the new CEO is cleaning up the bank and its bad assets will become more transparent than in the past.

4. High Stakes Huawei Gamble a Weight on US and Global Equities

1%20 %20copy

The Huawei Entity Listing appears to be a high stakes gamble by the US administration to counter the rise in Chinese economic power in an industry that is critical to the global economy.  It is evidence that the broader economic and trade dispute will be hard to resolve, and makes it harder for China and the US to resume trade negotiations.  This suggests that punitive tariffs may remain in place for much longer than expected and indeed may be expanded further.  Global trade and manufacturing activity appears to have been undermined by the trade dispute, and hopes of a recovery later in the year may continue to fade.  China is likely to retaliate; weakening the outlook for US companies.  It may also weaponise its exchange rate, allowing it to weaken further, adding to strength in the USD, dampening US equities. The market might assume that the Fed will cut rates to support the equity market, but this is unlikely until US financial conditions deteriorate further.  As such, we see a high risk of a weaker global equity market, and under-performance in EM and commodity currencies against safe havens, gold and JPY.

5. Global Banking Trends: Trusting the Signals

The PH Score™ identifies fundamental momentum opportunity from more than 2000 shares globally on a quarterly basis, always focusing on the top and bottom deciles. We combine our PH Score™ with a technical indicator and additional valuation metrics to arrive at VFM (Valuation, Fundamentals, Momentum) which filters potential opportunities worthy of further due diligence and a deep-dive.

The top PH and VFM decile can be a collection of the “good, bad, and the ugly”. Current “winners” from the “good category” include Asia Commercial Bank/Vietnam (ACB VN) and Bimb Holdings (BIMB MK). Both are not too cheap but not dear either given progress underway.

For all its predictive strength, the PH Score™ does not capture earnings quality and non-NPL toxicity that may lie in SMLs or “stage-2” Loans. We thus sometimes get false signals from the “winners” due to earnings quality above all. This is the case for some Chinese banks for example (though not the “Big Four”) which we have analysed in detail. The growth of impaired loans is a systemic challenge and it is not getting much better. This quarter, the high-yielding Chinese “Big Four” continue to stand out in Asia and globally with robust PH Scores, and especially on VFM given the oversold signals. They are arguably better value than Bank Of Ningbo Co Ltd A (002142 CH) and China Merchants Bank A (600036 CH) that are relatively strong narratives though the former is now looking more interesting than for some time. China’s role in the global financial and economic system is now so pivotal that these signals better be right and the country manages to avoid a hard landing which remains a scary scenario as any viewer of YouTube can testify to.

With altogether different technical characteristics to China, there is Argentina. This is a marginal part of the global ecosystem, something of a Frontier backwater. Perhaps it gets more coverage than it deserves. We are somewhat unsure though about how to assess the recent high PH Score™ out of Argentina, based on high earnings yields and concrete fundamental trends (and some non-recurring contributions), given elevated Franchise Valuations and asset quality erosion. This remains an extremely speculative market. (2019 Elections – Part 6. Argentina: Macri Magic and the Peronist Spell). Bank shares here have revived of late, in tune with elevated PH Scores, but we cannot but feel that further volatility lies ahead. While we still have some time before elections in October, some funds seem to be putting their money to work on the basis of an anti-Cristina Kirchner “shoe-in” thesis while others are trading the news. The bet here is despite the pervasive influence of anti-IMF Kirchnerismo, the population will choose not go the way of Venezuela and vote for a “tough on crime” candidate such as Macri as in Brazil. It may be too early to call but too late for a Macri economic bounce.

Banks in Japan and India are more relevant cogs in the wheel of global finance and commerce. Here, we remain somewhat cautious and our readings are backed up by granular analysis by experts Hemindra Hazari and J. Brian Waterhouse and the noteworthy strategic thinking and insights of Daniel Tabbush. Japan seems to be cheap (on Franchise Valuation and P/B) for a reason while India is expensive for no reason. This is what our system seems to say too though Japan is always going to feature on VFM given our focus on FV and oversold technical signals.

Brazil remains a complex political challenge with Bolsonaro’s honeymoon well and truly over, and commentators now talking about the “emperor’s clothes”. Banco Santander Brasil SA (SANB11 BZ) scores well on our PH system though shares are far from cheap. Victor Galliano here, in an original and logical way, has pinpointed opportunities in the credit operations of retailers across Brazil and within LATAM which may well be a better way to play consumer finance opportunity than with pure banks. On a separate note, it is a pity that Ecuador is such a small banking market as trends are compelling.

In Europe, the UK (not the scandal-ridden Metro but Lloyds Banking (LLOY LN), Barclays Plc (BARC LN) and Royal Bank Of Scotland (RBS LN)) and French banks score well too which again challenges our thinking given the current political stasis in the former (with the electorate split in three) with FX implications as well as the uncertain backdrop in the latter. UBS Group AG (UBSG VX) and Credit Suisse Group AG (CSGN SW) seem to be moving in the right direction and valuations are hardly stretched.

CP published a note recently about inward-looking Polish lenders which exhibit subpar scores. (Polish Banks: Latest Fundamental Trends and Valuations Instil Caution). We believe trends and valuation are not benign in Poland though Bank Ochrony Srodowiska SA (BOS PW), a smaller lender with almost Greek-style Asset Quality issues, exhibits both positive trends and a low valuation.

We await Greek numbers to see whether trends are beginning to tick upwards given the probable election of a more pro-market government and low valuations. (2019 Elections – Part 5. Greece: New Democracy Promises Magic Makeover).

Then there is beleaguered Turkey. Trends are not as strong as they were (maybe artificially so) though some PH Score™ would be lower but for valuations. Expert Ercan Uysal paints quite a bleak picture here and his arguments are both convincing and pertinent. While there may be trading opportunities ahead, amidst the volatility, the fabric of the system is being unravelled by toxic loans and the probability of capital raising is high. Overriding corporate leverage is now being accompanied by concern with consumer indebtedness as joblessness rises. Given key valuation metrics and oversold signals in some cases, selective Turkish banks do score well on VFM with fundamental trends perhaps still not fully reflecting the underlying picture as detailed by Ercan Uysal.

Russia remains an interesting Banking jurisdiction despite its systemic issues and restructuring. There are some pockets of value here though core EM favourite, Sberbank Of Russia Pjsc (SBER LI), commands a premium rating with a below average PH Score. Sberbank shares a similar profile to Credicorp Ltd (BAP US), Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB4 BZ) in this respect. We caution against chasing quality and would recommend considering these banks at lower levels though in the case of BBCA in particular it would be a much lower rating.

We continue to remain highly sceptical of Australia and Canada  – partly in relation to real estate asset bubbles. While trends are eroding in Australia, with its China interconnections, Canadian banks seem to be still bucking the trend, defying gravity with “as good as it gets” readings. They have been high scorers for some time -maybe artificially so.

Scandinavian banks, especially Danske Bank A/S (DANSKE DC) and Swedbank AB (SWEDA SS), are on a repair mission -amidst high household leverage- that will take time given the reputational damage suffered. PH Scores in Denmark and at Nordea Bank AB (NDA SS) are especially subpar.

Asia-Pacific remains the jurisdiction with the softest fundamental momentum -though China and Japan command very different headline trends. While Profitability trends are mixed, Asset Quality, and Liquidity -as opposed to NIM and Efficiency- are not moving in the right direction. We are awaiting some key data out of South Korea but recent high rankings seem to be coming under more pressure and valuations have remained low for sometime as the market searches for a catalyst. An interesting opportunity may lie in unloved Pakistan with Bank Alfalah (BAFL PA).

Regionally, in terms of trends, Europe is not much better than Asia-Pacific, though -as mentioned- the UK, France and the large Swiss Groups appear to be making headway. Italian and Spanish banks, the latter heavily exposed to EM, present a mixed picture in terms of fundamental trends. Germany remains very much all about Deutsche Bank Ag Registered (DBK GR) which trades on a par with Japanese banks on a FV basis. In Europe, while Profitability trends are mixed, NIM, Asset Quality, Capital Adequacy, and Provisioning are not moving in the right direction.

Fundamental trends in the Middle East are on a par with LATAM. Here profitability, NIM, CIR, and Capital Adequacy are all moving in the right direction though Liquidity, Provisioning, and Asset Quality are eroding. In LATAM, there is an even bigger jump in Profitability (as in US) though it is Asset Quality and Liquidity rather than Efficiency or Provisioning that exhibit positive change.

The regional jurisdictions with the best fundamental momentum remain the US and Africa. While valuations can be elevated in the latter, (some less liquid players are very cheap), they are not excessive at the former. Some positive standouts from the larger players are Citigroup Inc (C US) and State Street (STT US). In the US, Profitability, NIM, Efficiency, Asset Quality and Capitalisation exhibit progression. (In Africa, improvement is seen in Asset Quality, Liquidity, Provisioning, and NIM). The US does have issues (such as student loans and credit cards) like everyone else, just less so it seems. The banking sector stands out in the US on a relative value basis (what this says about other sectors is a moot point) but continues to be subverted by yield curve movements just as it looks primed for a move higher. The fact that shares seem unable to put together a discrete and sustained run should be a concern for us all. (US Banks: The “Least Dirty Laundry” In the Neighbourhood Though Check Under the Hood).

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