Brief India: India: Outlook on Capex Recovery Continues to Brighten and more

In this briefing:

1. India: Outlook on Capex Recovery Continues to Brighten
2. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short
3. Repsol, Petronas & Mitsui Make Massive Gas Find in Indonesia
4. Free Money Has Flown
5. StubWorld: Can One’s Offer For Kian Joo Can; Mahindra At Possible Set-Up Levels

1. India: Outlook on Capex Recovery Continues to Brighten

As per the CSO, gross fixed capital formation (GFCF) has grown above nominal GDP for 4 consecutive quarters now (latest data for September quarter). This, after GFCF grew slower than nominal GDP in 20 of the preceding 21 quarters. Capex cycle is thus picking up. And there are good reasons to expect this continue in the foreseeable future. Capacity utilisation is increasing in a broad-based manner. Liquidity conditions have improved, and cost of capital is likely to fall. Corporate profit cycle is no longer a headwind, although it is not yet a strong tailwind. The nascent signs of a recovery in the capex cycle are thus likely to get stronger in the months ahead.

2. Gold: Dovish Central Banks May Sustain Rally; Closing Our GLD Short

Central banks around the world have signaled their willingness to return back to the Easy Money Playbook in their quest to re-stimulate economic growth and inflation. This significant shift in market expectations has been the key factor driving the recent rally in Gold (GOLD COMDTY) prices, and it appears to have legs.  As such, we are closing our Spdr Gold Shares (GLD US) short.

3. Repsol, Petronas & Mitsui Make Massive Gas Find in Indonesia

Repsol SA (REP SM)‘s discovery is very significant for the companies involved and others around the area, which we discuss in detail below. It is also important for Indonesia, which requires more gas to supply domestic and export demand. It is also positive for exploration sentiment globally, to see a material discovery (Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps) and this may encourage further M&A in Indonesia such as this deal: (Indonesia Upstream Gas Asset Sale: Positive Read-Through to Other SE Asia Gas Companies).

4. Free Money Has Flown

The world will soon discover that debt matters.

The announcement of each round of QE increased asset prices, but the effect on Treasury bond prices began to fade when central bank purchases began. This unexpected behaviour revealed a little-known fact: asset prices react more to the expectation of changes in liquidity than to the experience of greater liquidity in financial markets. By contrast, economic growth is subject to the fluctuating standards of commercial bank lending, which follow variations in the demand for credit. Consequently, financial markets lead the economy. Meanwhile, central banks focus on lagging indicators, so they’re followers, not leaders. Bond markets usually predict more accurately than stock markets. To work, central bank easing policies require real risk-adjusted interest rates. However, with those rates below zero in many countries, further reductions would penalise lenders without helping borrowers. Thus, only rising inflation can save stressed debtors.

5. StubWorld: Can One’s Offer For Kian Joo Can; Mahindra At Possible Set-Up Levels

This week in StubWorld …

• Can One Bhd (CAN MK)‘s gets shareholder approval to launch a Mandatory General Offer for 33%-held Kian Joo Can Factory (KJC MK). (note, both legs are illiquid)
• Curtis Lehnert sees Mahindra & Mahindra (MM IN)‘s discount to NAV at its widest since 2015.

Preceding my comments on Can One/Kian Joo, Mahindra and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.