Thursday, June 27, 2013

Market/Economic Analysis: India

last week, the Indian ETF lost nearly 6% in the emerging market sell-off.  As I've noted previously, I'm bearish on the economy (see also here).  Let's look at the latest Central Bank policy statement to get an overview of the current economic environment.

In May, the Central Statistics Office (CSO) reported India’s GDP growth in Q4 of 2012-13 of 4.8 per cent, a marginal improvement over the previous quarter. During the current financial year, the growth of industrial production decelerated to 2.3 per cent in April after picking up in the preceding month. All constituent categories of industry have slowed, with a persistent contraction in mining activity. The sharp weakening in the growth of capital goods production points to still damped investment demand whereas a pick-up in consumer non-durables could be indicative of a fragile return of consumer confidence. On the other hand, the services sector purchasing managers’ index rose in May on order flows. The onset of the south-west monsoon has been strong and on time.

Let's place this slowdown into historical perspective:

The economy has definitely slowed from a 9% annual growth rate to 4.8% -- nearly a halving in output.  For a country that is trying to life hundreds of millions out of poverty, that is the wrong direction.

Headline WPI inflation eased for three months in succession with the May reading at 4.7 per cent, down from an average of 7.4 per cent in 2012-13. All constituent categories, barring food, have moderated. In the fuel category, coal and mineral oil prices declined, partly offsetting the upward revision in administered prices of electricity. Non-food manufactured products inflation too ebbed, driven by metal prices which fell for the eighth successive month in response to softening of global prices. Still elevated food inflation, particularly in respect of cereals and vegetables, sustained upside pressures on overall inflation. Retail inflation, as measured by the new combined (rural and urban) CPI, edged down from an average of 10.2 per cent last fiscal year to 9.3 per cent in May.

This is one piece of good news: over the last three months there has been a marked drop in the inflation rate.  This may allow them to lower rates further:

However, let's not get too excited about growth prospects just yet.  India has done little to nothing to alter their primary problems: a dilapidated infrastructure system, poor political environment, high budget deficit and current account deficit.

Let's turn to the market.

The Indian ETF was trading in a range between ~55 and ~62 for a period of 8 months.  Prices broke through support at the 56 level in early June and have been moving lower since.  Notice the two gaps lower on the chart, indicating big volume moves lower.  Now the shorter EMAs have moved through the 200 day EMA, with negative momentum and CMF readings.