Government inaction causes investment to flee Indian infrastructure: Indian stock markets to implode in the near term

Silently Foreign Institutional Investor money is fleeing from investments in Indian infrastructure. The latest to exit from all India Infrastructure investments was the world's largest India dedicated infrastructure fund, UK based 3i India Infrastructure Fund."While the case for infrastructure development in India remains unaltered, private infrastructure investment in India has faced more political, market and macroeconomic challenges than we expected when we initially made our commitment to the India Fund in 2007," 3i said in a statement issued last Thursday. As of March 2013, the fund's India investments were valued at about 80% of their cost in dollar terms, 3i said.



This is the latest in a continuing saga of enthusiastic FIIs investing in India and then pulling out after facing bureaucracy and intransigence from government officials. As I have blogged before, near term outlook for the Indian economy continues to deteriorate and it is only a matter of time before the bubbly Indian stock market implodes.

India IT outsourcing industry may be spiraling downwards hurting India's GDP further

Changing US immigration legislation landscape, slowdown in capital spending on IT and competition from newer, cheaper sources of IT labor pool such as the Philippines and China is forcing the Indian IT outsourcing industry to metamorphosize into providing alternative models of outsourced services (see video). IT outsourcing has created more than 2 million jobs and in 2012 contributed 6.4% of India's GDP according to the National Association of Software and Services Companies, based in New Delhi. Already, IT outsourcing behemoths such as Infosys are being squeezed by revenue pressures and forced to try new strategies in an increasingly commoditised  market. Unless a new paradigm shift in IT outsourcing occurs, Indian IT outsources may spiral downwards further hurting India's weak growth prospects. Investors are strongly cautioned to diversify away from IT outsourcing linked equities and increase their exposure to US dollar denominated assets.

Jim Rogers, famous commodities investors cautions on investing in India and points to upcoming war due to water

UR6ZR6UN9U9W Legendary Quantum Fund manager (along with George Soros) and commodities investor Jim Rogers is short Indian equities and has categorically declared that India while an exciting place to visit is not a place for him to invest in. In an interview with Bloomberg last week, Mr. Rogers proceeded to urge the Indian Government to figure out somehow how to run a country pointing to the non-convertibility of the Indian currency, the Rupee on the international markets. He has also blamed the restrictions on foreign investors as another reason why he feels the Indian government does not know how to run an economy.



As posted in an earlier blog post, this view on the Indian macroeconomic environment is reflected in investors moving their capital out of India and I believe it is only a matter of time before the current bubble in Indian equities which has built up again since the last pop in 2007 will burst again in the near future perhaps quite dramatically. Mr. Rogers also pointed out about the possibility of an upcoming war due to shortages of water resources in India and Pakistan. I have previously blogged about this possibility of a war between India and Pakistan in the near future as well.

Inflation is the growth killer - and the RBI stifles it further through monetary policy

Last month, the Governor of the RBI, delivered a lecture at the London School of Economics on India's macroeconomic challenges in which he more or less admitted that RBI's monetary policy was largely to blame for declining growth in India. A large portion of the lecture focused on the huge inflation problem in India which as measured by the wholesale price index(WPI) was 9.6% in 2010/11, 8.9% in 2011/12 and 7.5% 2012/13. According to the RBI the major driver from the supply side has been food inflation, arising from rising incomes, especially in rural areas, which is leading to a shift in dietary habits from cereals to protein foods, the monsoon related spike in prices of food items such as vegetables and global commodity prices, especially the price of crude oil. The price of crude especially affects Indian inflation very badly since India imports 80% of its oil demand.



This commodity inflation is further compounded by the depreciation of the rupee and lack of demand adjustment due to the Indian governments subsidized pricing regime of petroleum products. But the worst growth killer of all has been RBI's response in the form of monetary policy as the Governor himself admits in his speech.

End of the IT Outsourcing era approaching - Indian IT industry risks collapsing

One after another IT outsourcing industry bellwethers like Infosys and today Wipro have posted lower than expected revenues. Cognizant and HCL seem to be battling this downturn by firing employees to contain costs. As the Economic Times has opined, the industry needs to look for a new revenue model or risk dying out (also see graphic from the article). I will add that there is a fundamental shift in technology taking place such as the move towards cloud computing with the evolution of software as a service.



The long term trend for the IT Outsources if they do not change their model (and perhaps its too late now for them) seems to be on a slippery slope downwards towards irrelevance. Shorting these companies are more safely - staying away from them completely in your portfolios is highly recommended over the medium to long term.

Slowdown in Foreign Institutional fund flows into Indian equities may tell a story

A close look at Foreign Institutional Investors (FIIs) fund flows into and out of Indian equities may provide some clues on where the smart money is placing its bet. FIIs made a net investment of Rs 1,39,408 crore into Indian equities during the fiscal year ended March 31, 2013, according to SEBI. This was reportedly the highest net inflow by FIIs in a single fiscal year since their entry into Indian capital markets in 1992-93. Since the beginning of 2013, FIIs have invested Rs 56,218 crore, last week (April 15-18)the net inflow of FII funds of Rs 638 crore into India last week came after a net outflow of Rs 681 crore in the preceding week (April 7-11).



Masha Gordon of PIMCO (see video) has hinted why PIMCO is underweight on Indian equities. Funds have clearly  slowed also due to profit- booking, concerns over high current account deficit and political uncertainty.

With the arrest of Musharraf, Pakistan may be stumbling towards total anarchy - followed by a war

How the mighty have fallen! The man who took Pakistan very close to a nuclear war with India back in 1999  is now under arrest in his own country, an event which may ironically possibly trigger another nuclear confrontation with India attempting to finish the job he started. The Washington Post reports that Musharraf faces the prospect of prison or death, if convicted of treason and military commanders would certainly not accept the jailing of their former colleague at arms. Pakistan’s former military rulers have long been held responsible for the instability and militancy plaguing the country and for disrupting democratically elected governments and none have ever been held accountable.



This arrest may either be a game changer prompting the Pakistan army to try to broker a deal to send Musharraf packing - or more ominously - may create a diversion by opening an offensive against India in some way shape or form. Escalating response from India may bring inevitable instability in the whole region. The markets would do well to price in this geopolitical risk.

Irrational exuberance continues to send Indian markets climbing

The Economic times reported today that the Indian stock market market has risen higher for the week by 770 points. As I have blogged before there really is no basis for this continued irrational exuberance. The finger of blame for this steadily inflating bubble can be pointed to portfolio investments flowing in though Mauritius which is simply money laundered overseas by tax dodging citizens through hawala channels and returned back as legitimate portfolio investments through Mauritius.



The other channel for laundering this money is right in India in real estate in the major cities of Mumbai & New Delhi where the bubbly property market has reached stratospheric levels long time ago. When these multiple bubbles burst...and burst they will...look for shelter outside India...

Booming automobile market in India crashes - warning sign of major market in India crash to come?

Over the last few years, the Indian and international financial media has been harping on the growth in the Indian automobile industry (see video from the Financial Times) with frequent proclamations of an everlasting boom. The Economic Times has reported today how this boom has now crashed rather badly: "Last year, car sales grew 2.2 percent and the immediate future looks mostly gloomy for an industry that experts had expected to ring up annual car sales of 9 million by 2020 from less than 2 million this year, but looks set to significantly undershoot that target."

 

This is one of many warning signs of a major market crash to come in Indian markets. The banks will be next harbinger of bad news as loans start going into default in the next quarter or two.

Indian Stock Market Main board plunges to 7 month low

As warned in an earlier post, the Indian Stock Market has started its downward journey and reached new 7 month lows today. India also posted a record current account deficit in the October-December quarter causing the Indian rupee to weaken and foreign investors have now sold a net total of $137 million in Indian shares in the four trading sessions to Monday and a net total of $710.68 million in domestic debt over the same period, according to regulatory data.



I have always encouraged the diversification of portfolios away from an Indian equities focused portfolio to a more diversified global exposure. RBI's Liberalised Remittance Scheme in combination with fund houses in the Channel islands and Isle of Man are the right tools to use to achieve this diversification.

Pakistan Elections scheduled for May 11 will badly affect markets in US and India with war a possibility

The Washington Times reports today on how elections in Pakistan scheduled for next month pose a threat to the US drone program. What the article fails to report is that Pakistan analysts predict the centrist former prime minister Nawaz Shariff's PML-N will lead the polls with no party winning a majority of the seats although right wing parties look set to dominate. The resulting coalition government with the help of Pakistan's army generals will most likely take take a hard turn right and increase support for right wing extremists in their quest for greater control in neighboring Afghanistan as well as increase terrorism in Indian Kashmir.

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As reported by the Indian Express, Pakistan Army's SSG group was responsible for incursion into Indian Kashmir and beheading an Indian soldier. All these activities look set to increase exponentially post Pakistan's elections possibly leading to a re-involvement of the US or a war with India. Elections in India are scheduled for 2014 where a weakened national government is desperately seeking ways to boost its sagging popularity and a war with Pakistan may give the current coalition in India a much needed popularity boost in time for the 2014 elections. Unfortunately the victims of this geopolitical nightmare scenario are likely to be the general public and the stock markets in India and to some extent the US markets.

Does it make sense to invest in Indian equities in the medium term?

On Jan. 2nd, 2013 the Bombay Stock Exchange index, the SENSEX started the year on a falsely optimistic note at 19714.24. On Apr. 1st, 2013 It began the second quarter a lot less optimistically closing at 18864.75 (down 4% so far). Live Mint today published a possible explanation for this malaise citing falling car sales, air passenger traffic numbers and disappointing rise in HSBC's Indian PMI numbers. As the article points out, all this negativity comes at a time of double digit inflation and massive current account deficits in India.

This begs the question, does it really make sense to invest in Indian equities in the short to medium term? This is where RBI's Liberalised Remittance scheme allows Indian residents to diversify their investment exposure by allowing investment up to US$ 200,000 each calendar year in overseas investment instruments. Given today's propensity among Indian residents to send children overseas for education or settlement, it makes complete sense to set up a trust or other investment structures in tax free jurisdictions overseas so that investors can take advantage of tax free wealth accumulation.