India

In this briefing:

1. 2019 Elections – Part 3. India: Modi’s Magic Touch Fades as Populism Re-Appears
2. India: Monetary Policy Review – One More Rate Cut Likely
3. Screening the Silkroad: Small-Mid Cap – Possible High-Risk Names: Q1 2019

1. 2019 Elections – Part 3. India: Modi’s Magic Touch Fades as Populism Re-Appears

This insight is Part 3 of a six-part series on 2019 elections in which we evaluate key polls and their potential to re-shape the economic outlook and investment risk profiles. These six markets – Thailand, Indonesia, India, South Africa, Greece and Argentina – collectively represent one-quarter of the world’s population and more than $5 trillion in GDP. We review distinct domestic challenges as well as campaign pledges by incumbents (and their challengers) aimed at addressing them. We also humbly assign probabilities to baseline and alternative scenarios and their implications for macroeconomic outlook and investments.

Even amidst their diversity, these six jurisdictions display some remarkable similarities: subdued economic momentum, bouts of market volatility, signs of voter disquiet and/or disillusionment and an opposition looking to capitalize on all of these forces. In a bid to revive the ‘magic’ that had helped to install their administrations, many incumbent governments are now on the defence – either changing tack (and dialing back past policies) or attempting to convince voters to let their policies work their magic. 

Please refer to other insights in this series:

• Elections 2019 – Part 1. Thailand: Magic Moment for Democracy’s Return?
• Elections 2019 – Part 2. Indonesia: Jokowi’s Policies – Magic Bullet or Bitter Pill?
• Elections 2019 – Part 3. India: Modi’s Magic Touch Fades as Populism Makes a Comeback
• Elections 2019 – Part 4. South Africa: Ramaphosa – ANC’s Magician?
• Elections 2019 – Part 5. Greece: New Democracy Promises Magic Makeover
• Elections 2019 – Part 6. Argentina: Macri Magic and the Peronist Spell

2. India: Monetary Policy Review – One More Rate Cut Likely

At the first monetary policy meeting of the new RBI Governor, the MPC reduced the policy rate by 25bps to 6.25% and changed the stance of monetary policy to ‘neutral’ from ‘calibrated tightening’. Both were as expected by analysts and the markets. The MPC also significantly lowered its inflation projection and it now expects headline CPI inflation to remain below 4% for the foreseeable future. This new revised forecast, implies that there is space for one more rate cut. I expect the MPC to use this space in its April policy review before going on pause for the subsequent few policy reviews. Today’s rate cut does not, by itself, suggest that the new Governor will be unduly dovish. That said, given the slightly surprising voting pattern, the minutes of the policy meeting (to be released after two weeks) will provide a bit more color on the changed dynamics in the MPC.

3. Screening the Silkroad: Small-Mid Cap – Possible High-Risk Names: Q1 2019

Increasing risk apparent

• Q4-2018 Small-Mid Cap High-Risk screen ( Screening the Silkroad: Small-Mid Cap – High-Risk Names To Avoid Q4 2018 ) delivered a market cap average share price decline of 4.5%. This compares with the MSCI Asia Pacific Index appreciating 4.2% over the same period. 
• Our screen looks for high valuation multiples presented by candidates, with significant earnings growth forecasts, as well as financial indicators that suggest balance sheet distress. 
• The Risk to this screen: The Financial and Utility sectors are not covered in this screen. Moreover, “risk is not a number, it is a concept or notion”, as James Mortiner cited during his time at Société Genéralé. Hence, some stocks due to their business model being realigned to a more profitable approach may appear on this screen, whilst also be a member of more positive value or quality screens.
• 26-stocks appear in our Q1 2019 screen. Eight (8) of which are new, namely from Korea, Japan and Taiwan. Singapore remains absent from the screen for the third quarter running, whilst New Zealand has only presented one candidate in Q4 2018.

• Our screen suggests that risk is increasing amongst the small-mid cap universe, as the Alman Z average score slips to 1.14 in Q1 2019 from 1.16 in Q4 2018 and 1.38 in Q3 2018. Moreover, our average stock in the list has a ranking of 42.3, compared to 54.9 in Q4 2019. 

Our screening styles

For those that follow us, you will know our Stock Ranking system from our Notes from the Silk Road: Setting Out Our Small-Mid Cap Lemonade Stand  For newcomers to our notes, it is merely a tool for identifying favourable and unfavourable stocks. In addition, to add more depth to our selection process we also monitor a series of “style categories” namely:

■ Growth, 
■ Value, 
■ Quality,
■ Momentum, 
■ Deep Value, 
■ Income,
■ Underperformance.

Within these style categories, we drill down further through a series of alpha momentum screens allowing us to differentiate and identify stock picks. 

In this briefing:

1. India – Overweight
2. A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies

1. India – Overweight

We reiterate our overweight call on Indian equities. Our December Austrian Stress Indicator update suggested that the business cycle was still stuck but the economy is gathering momentum. Fiscal policy has turned expansionary and will support consumption, particularly rural spending. Monetary conditions are easing and we expect the next move in policy rates to be down. The private investment cycle should be turning up by the end of the year. Strengthening economic activity together with an improvement in the current account balance should also underpin a recovery in the rupee. 

2. A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies

Our analysis shows that there are an unbelievable 25+ LNG developers that have stated (within the last year) they will take a final investment decision (FID) on their LNG liquefaction plants in 2019. Unless demand surprises to the upside, the expected LNG supply deficit in the mid-2020s could easily turn into a glut. In total there is almost 250 million tonnes per annum (mtpa) of capacity that plans to take FID this year – the equivalent of 80% of current global supply. In total there are ~US$180bn of contracts up for grabs – it should be a bumper year for the oil service (E&C) companies.  This should be positive for the LNG contractors such as Mcdermott Intl (MDR US), TechnipFMC PLC (FTI FP), Chiyoda Corp (6366 JP) and Jgc Corp (1963 JP) .

In this briefing:

1. A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies
2. India Union Budget FY20: Electoral Compulsions Visible but Not Completely Overboard!!
3. ­­Asian Credit Monitor: Infrastructure Leasing & Financial Services – INR Bond Default
4. China Strategy of Promising to Buy Stuff Just Might Work on Trump as He Looks for an Easy “victory”

1. A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies

Our analysis shows that there are an unbelievable 25+ LNG developers that have stated (within the last year) they will take a final investment decision (FID) on their LNG liquefaction plants in 2019. Unless demand surprises to the upside, the expected LNG supply deficit in the mid-2020s could easily turn into a glut. In total there is almost 250 million tonnes per annum (mtpa) of capacity that plans to take FID this year – the equivalent of 80% of current global supply. In total there are ~US$180bn of contracts up for grabs – it should be a bumper year for the oil service (E&C) companies.  This should be positive for the LNG contractors such as Mcdermott Intl (MDR US), TechnipFMC PLC (FTI FP), Chiyoda Corp (6366 JP) and Jgc Corp (1963 JP) .

2. India Union Budget FY20: Electoral Compulsions Visible but Not Completely Overboard!!

Expected Election Budget

The Indian Union Budget FY20 announced last week in the run-up to General Elections in May 2019 was without a doubt, a populist budget. It has directly touched the two key vote banks in India i.e. Middle Class and the Farmers. While a welfare announcement for farmers was expected due to significant distress in the rural hinterland, the tax sops given to the middle class was an unexpected surprise to take care of a growing disenchantment of this particular section considered to be a strong supporter of the ruling party.

Within acceptable fiscal imprudence

Despite being a populist budget with a slew of welfare handouts, the Government continued its commitment on fiscal prudence as the slippages are marginal. Even the assumptions in the budget don’t seem very aggressive albeit some of them might be difficult to achieve.

Consumption boost amid flagging economic growth

We believe that the income support scheme to the farmers and the tax sops to the middle class may eventually drive consumption and that may also benefit the government through indirect taxes. However, on the flip side these welfare schemes have come at the cost of capital expenditure that may derail the high growth that was witnessed in the manufacturing sector in recent times.

Our verdict: A one-off

The Modi government over the last four odd years has implemented and introduced a number of programs, interventions which we believe will go a long way in boosting the productivity of the Indian economy structurally. Notable ones were in health, infrastructure, financial inclusion, pension and social security.  Since all these measures are more long term in nature and might not have an immediate impact on the electorate, this interim budget is a departure in a sense, aimed to enhance the government’s chance of a 2nd term. Therefore, we think this budget is a one-off event and believe that this government’s focus on productivity enhancements and structural reforms may continue going forward if re-elected. As it is, all the fiscal assumptions will be revisited in July, but the current estimates we believe are not too far off the mark.

Will the voter be enthused, that’s anybody’s guess.

We look at some of the key points in detail

3. ­­Asian Credit Monitor: Infrastructure Leasing & Financial Services – INR Bond Default

We chose to study Infrastructure Leasing & Financial Services Ltd (ILFS)’s default case. The company is engaged in infrastructure development and financing activities in India. Since the start of June 2018, the company has defaulted on a series of payments, resulting in rating downgrades. More recently, in January 2019, ILFS’ affiliated company Jharkhand Road Projects Implementation Company failed to pay INR760m due to its lenders. This resulted in CRISIL downgrading the bonds to D, which amounts to junk status. ILFS is one of the most important companies in the Indian infrastructure space and this default indicates signs of worry for investors.

4. China Strategy of Promising to Buy Stuff Just Might Work on Trump as He Looks for an Easy “victory”

• US-China trade negotiations are focusing on the easy parts to avoid truly difficult discussions on thornier structural issues.
• Beijing is trying to buy their way to a compromise by taking out their checkbook and promising to buy more US products.
• A truly comprehensive trade pact will be difficult, perhaps even impossible, to reach.
  That’s because many of the problems Washington wants resolved in China will require more than a few regulatory tweaks.
• The bureaucratic harassment, theft of intellectual property, and overt favoritism toward local firms that make doing business in China difficult for American chief executives are caused by the very way the Chinese economy works.
• Changing these procedures means changing China’s basic economic system. Beijing’s leaders cannot possibly achieve such an overhaul in the short term—assuming they even want to.

CNBC Interview of David Riedel on US-China Trade

In this briefing:

1. ­­Asian Credit Monitor: Infrastructure Leasing & Financial Services – INR Bond Default
2. China Strategy of Promising to Buy Stuff Just Might Work on Trump as He Looks for an Easy “victory”
3. RRG Global Macro Weekly – Poland and Malaysia Face External Forces in 2019
4. Real Estate – Theme of the Year
5. ICICI Bank Ex-Chief: No Crime Here, Only Bad Conduct?

1. ­­Asian Credit Monitor: Infrastructure Leasing & Financial Services – INR Bond Default

We chose to study Infrastructure Leasing & Financial Services Ltd (ILFS)’s default case. The company is engaged in infrastructure development and financing activities in India. Since the start of June 2018, the company has defaulted on a series of payments, resulting in rating downgrades. More recently, in January 2019, ILFS’ affiliated company Jharkhand Road Projects Implementation Company failed to pay INR760m due to its lenders. This resulted in CRISIL downgrading the bonds to D, which amounts to junk status. ILFS is one of the most important companies in the Indian infrastructure space and this default indicates signs of worry for investors.

2. China Strategy of Promising to Buy Stuff Just Might Work on Trump as He Looks for an Easy “victory”

• US-China trade negotiations are focusing on the easy parts to avoid truly difficult discussions on thornier structural issues.
• Beijing is trying to buy their way to a compromise by taking out their checkbook and promising to buy more US products.
• A truly comprehensive trade pact will be difficult, perhaps even impossible, to reach.
  That’s because many of the problems Washington wants resolved in China will require more than a few regulatory tweaks.
• The bureaucratic harassment, theft of intellectual property, and overt favoritism toward local firms that make doing business in China difficult for American chief executives are caused by the very way the Chinese economy works.
• Changing these procedures means changing China’s basic economic system. Beijing’s leaders cannot possibly achieve such an overhaul in the short term—assuming they even want to.

CNBC Interview of David Riedel on US-China Trade

3. RRG Global Macro Weekly – Poland and Malaysia Face External Forces in 2019

• Poland: Could be a beneficiary of Brexit if Poles return to boost domestic demand. Unemployment of 5.5% provides room for workers.
• Brazil: Congress returning to discuss market-friendly policies from Bolsonaro – Pensions are top of list for reform
• Malaysia: Extremely dependent on external trade Malaysia has done well recently but may face headwinds if global growth slows.

4. Real Estate – Theme of the Year

The budget 2019 was indeed a tax-payers budget in which the main focus, of course, was on the lower and middle-class consumers. Out of all the tax proposals, the limelight was on the keen real estate sector in which there were substantial amendments made which in turn will act as a Santa to troubled Real Estate sector especially for the companies who are into the business of construction of affordable housing and low to mid-income housing.

5. ICICI Bank Ex-Chief: No Crime Here, Only Bad Conduct?

The press statement issued by ICICI Bank based on the enquiry report headed by Justice (Retd.) Srikrishna to investigate the allegations against Chanda Kochhar appears deliberately confusing and convoluted. While it states that Chanda Kochhar was in violation of the bank’s Code of Conduct, on the more serious charge of whether her conduct violated Indian laws, it is surprisingly vague. The media highlighted  the anomaly that the ICICI Bank board first absolved Kochhar, and the same board now found her guilty of violating its internal code of conduct. Media outlets portrayed the punishment sought by ICICI Bank against its former CEO (demanding a ‘claw back’ of all the bonuses and stock options given to her during her tenure as CEO) as stringent.

Although, in monetary terms, the penalty may be substantial, it is insignificant when compared with jail time for a possible criminal offence. From the press statement of ICICI Bank, it would appear that the Srikrishna report falls far short of the First Information Report (FIR) filed by the Central Bureau of Investigation (CBI); the latter charged her with the “suspected offence of criminal conspiracy, cheating, public servant taking illegal gratification/undue advantage, criminal misconduct of public servant and abuse of official position by public servant.”

In this briefing:

1. Semiconductor Memory Business Shrinking Fast
2. Fiscally-Prudent Budget Benefits Farmers, Informal Workers; Lower Policy Rate to Spur Faster Growth
3. India: Budget 2019 – Hello Populism
4. The Dollar Is Already Dead

1. Semiconductor Memory Business Shrinking Fast

Earnings have been announced for Intel, Samsung, SK hynix, and Western Digital, and the memory business is clearly undermining all of these companies’ earnings.  In this Insight I review each of the  companies to show where they are, and will explain what the future holds for them as today’s oversupply unfolds.

2. Fiscally-Prudent Budget Benefits Farmers, Informal Workers; Lower Policy Rate to Spur Faster Growth

India’s finance minister, Piyush Goyal (standing in for Arun Jaitley, who was hospitalised for cancer treatment just 8 days ago) delivered a spectacular interim Budget — sustaining fiscal prudence while selectively providing rational, market-oriented support to farmers, the middle-class and workers in the unorganised sector. Unlike the Congress party’s dole/hand-out schemes (such as the 2009 and Dec2018 farm-loan waivers) which act as a disincentive to work, the BJP’s are carefully-designed to provide supplemental income while still rewarding those actually working or making timely repayments of loans. 

The government’s net market borrowing in the fiscal year-to-date (April-November 2018) was down 21% YoY — helped by 16.7% YoY growth in corporate tax and 16.1% YoY increase in income tax revenue. Given that CPI inflation has moderated sharply to 2.2% YoY in December 2018 (and 2.3% YoY the previous month), there is now scope for the RBI to undo last year’s policy error and cut the policy rate by 50bp. This could be spread out over two MPC meetings (although we think it would be better to do it in one move next week). The spur to growth will be substantial, enabling real GDP to accelerate to 8% YoY growth in FY2019/20.    

The most transformative step, however, entails a pension scheme for the “unorganised sector” (where workers currently have virtually no rights whatsoever, in contrast with the gold-plated safeguards available to organised-sector workers, which act as a deterrent to enhanced organised-sector employment). In order to obtain a future pension of Rs3000 per month, unorganised-sector workers will be required to contribute Rs100 monthly during their working years. (That it is contribution-based and not a hand-out is another positive). By thus self-identifying themselves, at least 100 million unorganised-sector workers will be better counted. Eventually, the vast gulf in safeguards/protections between organised and unorganised-sector workers can begin to be bridged if the latter can be identified. In bridging that vast gulf lies the prospect of a much more flexible labour market in future. Through universal health insurance, universal access to bank accounts, universal sanitation, and free access to clean cooking gas for rural women, this government has provided a comprehensive basis for civilised living that half of India previously lacked. When combined with the GST, insolvency & bankruptcy code, and a flexible labour market, the groundwork has been laid for India to be propelled toward average annual real GDP growth of 10% over the next five years. With interest rates set to decline, and growth set to strengthen, we recommend staying Overweight Indian equities. 

3. India: Budget 2019 – Hello Populism

The NDA Government presented its 5^th and final budget before they face elections in a few months’ time. This budget should have been a non-event due to the long followed tradition in which outgoing governments do not present a proper budget but only present a short vote-on-account (which essentially is just taking approval for routine government expenditure till the time the new government is in place). But it was known this would not be a non-event given the political scenario and the media was full of rumours of what the government may or may not announce in the budget. But we were looking for just 2 things in the budget: first, whether the government will take a decisive populist turn and second while the government will meet the fiscal math, are the assumptions underlying those credible. And sadly, the answer to the first question was a yes and to the second question a no. But perversely, this will not matter, at least in the short-run due to the fact that full fledged implementation in a short-period is not possible and secondly, by the time the full year fiscal deficit numbers are out, elections would be over and focus would shift to the new government and its budget.

4. The Dollar Is Already Dead

The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.

In this briefing:

1. Real Estate – Theme of the Year
2. ICICI Bank Ex-Chief: No Crime Here, Only Bad Conduct?
3. Follow The Money
4. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price
5. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st

1. Real Estate – Theme of the Year

The budget 2019 was indeed a tax-payers budget in which the main focus, of course, was on the lower and middle-class consumers. Out of all the tax proposals, the limelight was on the keen real estate sector in which there were substantial amendments made which in turn will act as a Santa to troubled Real Estate sector especially for the companies who are into the business of construction of affordable housing and low to mid-income housing.

2. ICICI Bank Ex-Chief: No Crime Here, Only Bad Conduct?

The press statement issued by ICICI Bank based on the enquiry report headed by Justice (Retd.) Srikrishna to investigate the allegations against Chanda Kochhar appears deliberately confusing and convoluted. While it states that Chanda Kochhar was in violation of the bank’s Code of Conduct, on the more serious charge of whether her conduct violated Indian laws, it is surprisingly vague. The media highlighted  the anomaly that the ICICI Bank board first absolved Kochhar, and the same board now found her guilty of violating its internal code of conduct. Media outlets portrayed the punishment sought by ICICI Bank against its former CEO (demanding a ‘claw back’ of all the bonuses and stock options given to her during her tenure as CEO) as stringent.

Although, in monetary terms, the penalty may be substantial, it is insignificant when compared with jail time for a possible criminal offence. From the press statement of ICICI Bank, it would appear that the Srikrishna report falls far short of the First Information Report (FIR) filed by the Central Bureau of Investigation (CBI); the latter charged her with the “suspected offence of criminal conspiracy, cheating, public servant taking illegal gratification/undue advantage, criminal misconduct of public servant and abuse of official position by public servant.”

3. Follow The Money

• January data on investor positioning show a big improvement in risk appetite for Emerging Markets
• Two-year ahead returns from risk assets likely to be sizeable and positive
• However, not clear that we are yet definitely at the ‘bottom’
• Strongest convictions are to favour EM over US and China over India

4. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price

Asian LNG spot prices have dropped for a short time below the UK NBP gas price, reversing the established trend that sees Asian LNG offering a premium to the European LNG price benchmarks. This note takes a look at the latest trends in the LNG markets and the renewed plans unveiled by Qatar to challenge its competitors, in particular, those from the US.

5. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 63.8% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• Edvantage Group (Hong Kong, ~US$100m)
• Koolearn (Hong Kong, re-filed)
• Shangde Qizhi Education Group (Hong Kong, re-filed)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• China’s Sinochem Energy lets Hong Kong IPO application lapse
• India’s Cleartrip eyes IPO as it plans Gulf expansion
• Blackstone set to IPO inaugural $1 billion Reit before March
• Bursa Malaysia’s outgoing CEO says IPO pipeline for 2019 looks strong
• China to Scrap Price, Debut Gain Limits to Entice Tech IPOs

Smartkarma Community’s this week Analysis on Upcoming IPO

• Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
• Chalet Hotels IPO Review – Backed up into a Corner
• CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates
• IPO Radar: KTB Securities, the Only Korean Broker in Thailand
• Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio
• Dreamtech: Trying for an IPO Again at a Lower Price
• Bharat Hotels Pre-IPO – Catching up with Peers
• China Tower Corp: Trading Idea Before Lock-Up Expiry
• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing

List of pre-IPO Coverage on Smartkarma

In this briefing:

1. Fiscally-Prudent Budget Benefits Farmers, Informal Workers; Lower Policy Rate to Spur Faster Growth
2. India: Budget 2019 – Hello Populism
3. The Dollar Is Already Dead

1. Fiscally-Prudent Budget Benefits Farmers, Informal Workers; Lower Policy Rate to Spur Faster Growth

India’s finance minister, Piyush Goyal (standing in for Arun Jaitley, who was hospitalised for cancer treatment just 8 days ago) delivered a spectacular interim Budget — sustaining fiscal prudence while selectively providing rational, market-oriented support to farmers, the middle-class and workers in the unorganised sector. Unlike the Congress party’s dole/hand-out schemes (such as the 2009 and Dec2018 farm-loan waivers) which act as a disincentive to work, the BJP’s are carefully-designed to provide supplemental income while still rewarding those actually working or making timely repayments of loans. 

The government’s net market borrowing in the fiscal year-to-date (April-November 2018) was down 21% YoY — helped by 16.7% YoY growth in corporate tax and 16.1% YoY increase in income tax revenue. Given that CPI inflation has moderated sharply to 2.2% YoY in December 2018 (and 2.3% YoY the previous month), there is now scope for the RBI to undo last year’s policy error and cut the policy rate by 50bp. This could be spread out over two MPC meetings (although we think it would be better to do it in one move next week). The spur to growth will be substantial, enabling real GDP to accelerate to 8% YoY growth in FY2019/20.    

The most transformative step, however, entails a pension scheme for the “unorganised sector” (where workers currently have virtually no rights whatsoever, in contrast with the gold-plated safeguards available to organised-sector workers, which act as a deterrent to enhanced organised-sector employment). In order to obtain a future pension of Rs3000 per month, unorganised-sector workers will be required to contribute Rs100 monthly during their working years. (That it is contribution-based and not a hand-out is another positive). By thus self-identifying themselves, at least 100 million unorganised-sector workers will be better counted. Eventually, the vast gulf in safeguards/protections between organised and unorganised-sector workers can begin to be bridged if the latter can be identified. In bridging that vast gulf lies the prospect of a much more flexible labour market in future. Through universal health insurance, universal access to bank accounts, universal sanitation, and free access to clean cooking gas for rural women, this government has provided a comprehensive basis for civilised living that half of India previously lacked. When combined with the GST, insolvency & bankruptcy code, and a flexible labour market, the groundwork has been laid for India to be propelled toward average annual real GDP growth of 10% over the next five years. With interest rates set to decline, and growth set to strengthen, we recommend staying Overweight Indian equities. 

2. India: Budget 2019 – Hello Populism

The NDA Government presented its 5^th and final budget before they face elections in a few months’ time. This budget should have been a non-event due to the long followed tradition in which outgoing governments do not present a proper budget but only present a short vote-on-account (which essentially is just taking approval for routine government expenditure till the time the new government is in place). But it was known this would not be a non-event given the political scenario and the media was full of rumours of what the government may or may not announce in the budget. But we were looking for just 2 things in the budget: first, whether the government will take a decisive populist turn and second while the government will meet the fiscal math, are the assumptions underlying those credible. And sadly, the answer to the first question was a yes and to the second question a no. But perversely, this will not matter, at least in the short-run due to the fact that full fledged implementation in a short-period is not possible and secondly, by the time the full year fiscal deficit numbers are out, elections would be over and focus would shift to the new government and its budget.

3. The Dollar Is Already Dead

The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.

In this briefing:

1. ICICI Bank Ex-Chief: No Crime Here, Only Bad Conduct?
2. Follow The Money
3. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price
4. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st
5. Semiconductor Memory Business Shrinking Fast

1. ICICI Bank Ex-Chief: No Crime Here, Only Bad Conduct?

The press statement issued by ICICI Bank based on the enquiry report headed by Justice (Retd.) Srikrishna to investigate the allegations against Chanda Kochhar appears deliberately confusing and convoluted. While it states that Chanda Kochhar was in violation of the bank’s Code of Conduct, on the more serious charge of whether her conduct violated Indian laws, it is surprisingly vague. The media highlighted  the anomaly that the ICICI Bank board first absolved Kochhar, and the same board now found her guilty of violating its internal code of conduct. Media outlets portrayed the punishment sought by ICICI Bank against its former CEO (demanding a ‘claw back’ of all the bonuses and stock options given to her during her tenure as CEO) as stringent.

Although, in monetary terms, the penalty may be substantial, it is insignificant when compared with jail time for a possible criminal offence. From the press statement of ICICI Bank, it would appear that the Srikrishna report falls far short of the First Information Report (FIR) filed by the Central Bureau of Investigation (CBI); the latter charged her with the “suspected offence of criminal conspiracy, cheating, public servant taking illegal gratification/undue advantage, criminal misconduct of public servant and abuse of official position by public servant.”

2. Follow The Money

• January data on investor positioning show a big improvement in risk appetite for Emerging Markets
• Two-year ahead returns from risk assets likely to be sizeable and positive
• However, not clear that we are yet definitely at the ‘bottom’
• Strongest convictions are to favour EM over US and China over India

3. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price

Asian LNG spot prices have dropped for a short time below the UK NBP gas price, reversing the established trend that sees Asian LNG offering a premium to the European LNG price benchmarks. This note takes a look at the latest trends in the LNG markets and the renewed plans unveiled by Qatar to challenge its competitors, in particular, those from the US.

4. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 63.8% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• Edvantage Group (Hong Kong, ~US$100m)
• Koolearn (Hong Kong, re-filed)
• Shangde Qizhi Education Group (Hong Kong, re-filed)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• China’s Sinochem Energy lets Hong Kong IPO application lapse
• India’s Cleartrip eyes IPO as it plans Gulf expansion
• Blackstone set to IPO inaugural $1 billion Reit before March
• Bursa Malaysia’s outgoing CEO says IPO pipeline for 2019 looks strong
• China to Scrap Price, Debut Gain Limits to Entice Tech IPOs

Smartkarma Community’s this week Analysis on Upcoming IPO

• Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
• Chalet Hotels IPO Review – Backed up into a Corner
• CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates
• IPO Radar: KTB Securities, the Only Korean Broker in Thailand
• Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio
• Dreamtech: Trying for an IPO Again at a Lower Price
• Bharat Hotels Pre-IPO – Catching up with Peers
• China Tower Corp: Trading Idea Before Lock-Up Expiry
• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing

List of pre-IPO Coverage on Smartkarma

5. Semiconductor Memory Business Shrinking Fast

Earnings have been announced for Intel, Samsung, SK hynix, and Western Digital, and the memory business is clearly undermining all of these companies’ earnings.  In this Insight I review each of the  companies to show where they are, and will explain what the future holds for them as today’s oversupply unfolds.

In this briefing:

1. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price
2. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st
3. Semiconductor Memory Business Shrinking Fast
4. Fiscally-Prudent Budget Benefits Farmers, Informal Workers; Lower Policy Rate to Spur Faster Growth
5. India: Budget 2019 – Hello Populism

1. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price

Asian LNG spot prices have dropped for a short time below the UK NBP gas price, reversing the established trend that sees Asian LNG offering a premium to the European LNG price benchmarks. This note takes a look at the latest trends in the LNG markets and the renewed plans unveiled by Qatar to challenge its competitors, in particular, those from the US.

2. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 63.8% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• Edvantage Group (Hong Kong, ~US$100m)
• Koolearn (Hong Kong, re-filed)
• Shangde Qizhi Education Group (Hong Kong, re-filed)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• China’s Sinochem Energy lets Hong Kong IPO application lapse
• India’s Cleartrip eyes IPO as it plans Gulf expansion
• Blackstone set to IPO inaugural $1 billion Reit before March
• Bursa Malaysia’s outgoing CEO says IPO pipeline for 2019 looks strong
• China to Scrap Price, Debut Gain Limits to Entice Tech IPOs

Smartkarma Community’s this week Analysis on Upcoming IPO

• Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
• Chalet Hotels IPO Review – Backed up into a Corner
• CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates
• IPO Radar: KTB Securities, the Only Korean Broker in Thailand
• Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio
• Dreamtech: Trying for an IPO Again at a Lower Price
• Bharat Hotels Pre-IPO – Catching up with Peers
• China Tower Corp: Trading Idea Before Lock-Up Expiry
• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing

List of pre-IPO Coverage on Smartkarma

3. Semiconductor Memory Business Shrinking Fast

Earnings have been announced for Intel, Samsung, SK hynix, and Western Digital, and the memory business is clearly undermining all of these companies’ earnings.  In this Insight I review each of the  companies to show where they are, and will explain what the future holds for them as today’s oversupply unfolds.

4. Fiscally-Prudent Budget Benefits Farmers, Informal Workers; Lower Policy Rate to Spur Faster Growth

India’s finance minister, Piyush Goyal (standing in for Arun Jaitley, who was hospitalised for cancer treatment just 8 days ago) delivered a spectacular interim Budget — sustaining fiscal prudence while selectively providing rational, market-oriented support to farmers, the middle-class and workers in the unorganised sector. Unlike the Congress party’s dole/hand-out schemes (such as the 2009 and Dec2018 farm-loan waivers) which act as a disincentive to work, the BJP’s are carefully-designed to provide supplemental income while still rewarding those actually working or making timely repayments of loans. 

The government’s net market borrowing in the fiscal year-to-date (April-November 2018) was down 21% YoY — helped by 16.7% YoY growth in corporate tax and 16.1% YoY increase in income tax revenue. Given that CPI inflation has moderated sharply to 2.2% YoY in December 2018 (and 2.3% YoY the previous month), there is now scope for the RBI to undo last year’s policy error and cut the policy rate by 50bp. This could be spread out over two MPC meetings (although we think it would be better to do it in one move next week). The spur to growth will be substantial, enabling real GDP to accelerate to 8% YoY growth in FY2019/20.    

The most transformative step, however, entails a pension scheme for the “unorganised sector” (where workers currently have virtually no rights whatsoever, in contrast with the gold-plated safeguards available to organised-sector workers, which act as a deterrent to enhanced organised-sector employment). In order to obtain a future pension of Rs3000 per month, unorganised-sector workers will be required to contribute Rs100 monthly during their working years. (That it is contribution-based and not a hand-out is another positive). By thus self-identifying themselves, at least 100 million unorganised-sector workers will be better counted. Eventually, the vast gulf in safeguards/protections between organised and unorganised-sector workers can begin to be bridged if the latter can be identified. In bridging that vast gulf lies the prospect of a much more flexible labour market in future. Through universal health insurance, universal access to bank accounts, universal sanitation, and free access to clean cooking gas for rural women, this government has provided a comprehensive basis for civilised living that half of India previously lacked. When combined with the GST, insolvency & bankruptcy code, and a flexible labour market, the groundwork has been laid for India to be propelled toward average annual real GDP growth of 10% over the next five years. With interest rates set to decline, and growth set to strengthen, we recommend staying Overweight Indian equities. 

5. India: Budget 2019 – Hello Populism

The NDA Government presented its 5^th and final budget before they face elections in a few months’ time. This budget should have been a non-event due to the long followed tradition in which outgoing governments do not present a proper budget but only present a short vote-on-account (which essentially is just taking approval for routine government expenditure till the time the new government is in place). But it was known this would not be a non-event given the political scenario and the media was full of rumours of what the government may or may not announce in the budget. But we were looking for just 2 things in the budget: first, whether the government will take a decisive populist turn and second while the government will meet the fiscal math, are the assumptions underlying those credible. And sadly, the answer to the first question was a yes and to the second question a no. But perversely, this will not matter, at least in the short-run due to the fact that full fledged implementation in a short-period is not possible and secondly, by the time the full year fiscal deficit numbers are out, elections would be over and focus would shift to the new government and its budget.

In this briefing:

1. The Dollar Is Already Dead
2. 2019 Semiconductors: 5%+ Decline
3. India Banks – Consumer and Mortgage Also a Risk

1. The Dollar Is Already Dead

The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.

2. 2019 Semiconductors: 5%+ Decline

An earlier post outlined the general direction of the Objective Analysis 2019 forecast but didn’t provide any numbers.  In this post I explain the 5%+ decrease in revenues that the market will experience and how and why various elements play into that number.

3. India Banks – Consumer and Mortgage Also a Risk

As new numbers are released, we have a better glimpse of where we are in the bad loan cycle, and the data is not reassuring. And we see that it is not only about risk with infrastructure or corporate loans in India, even if these are the most well-known credit risks. Housing loans are not immune from the economic malaise that remains in place. Non-bank financial company (NBFC) Can Fin Homes (CANF IN) shows exceptionally high quarterly bad loan growth in the latest period. Recalling our note on HDFC Bank, consumer loans more generally, may not be as robust as most believe.  And there are others.