Macronomics: A Look Back at 2013, and What 2014 Has In Store
This is an archive for Capital Mind Premium subscribers, sent on 30 Dec 2013.
You never know what a new year can bring, and 2013 was no exception. It brought the worst this economy has seen for a few years, including horrible GDP growth, ludicrously high inflation, moribund industry, a critical fiscal deficit and a dollar-rupee exchange rate that seems to have permanently moved to a two digit number starting with 6.
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At a personal level it has been a year of intense highs and lows. I saw a heart attack in the family (luckily all is okay now), a brain surgery of a close friend, and a rough time with my back. All those aside, things have been remarkable on the business front, with Capital Mind going places, my moving it to a full-time business and starting the Premium offering. The response has been fantastic and I’d like to thank all subscribers for signing up!
Markets have been volatile but that’s how markets are supposed to be. Pakistan tried the silly measure of saying that stocks are not allowed to go down, in 2008. And guess what, they didn’t go up either and volume vanished. Eventually when they realized and let things go, the market dipped and then recovered. Any trader or investor must learn to embrace volatility; if you don’t, you will
Stock Markets
The Nifty saw a gain of about 250 points, going from 5950 on Jan 1 to about 6291 on December 30. The market hit a low of 5285 in August, during the tumultuous rupee time.
It was literally the large-cap year. While the Nifty did a good 6.5%, the Junior (the next 50 stocks) did just 4.4%. Midcaps were down 6%, while smallcaps came battered and bruised to the party.
Sectorally, Real estate was blown apart by markets, while the biggest winner was the IT space.
Interestingly, Auto and consumptions stocks (like FMCG) did really well, and one of the reasons was the undying inflation in the markets. However this is incongruent to data that shows that sales growth is dipping in these sectors!
Money and Banking
We saw a mixed bag for interest rates in the year. The year started with Repo rates at 8%, but as inflation starting showing signs of moderation, we saw rates drop three times till May, when it reached 7.25%. The turbulent forex season came in, inflation returned and rates were hiked in September and October to 7.75%.
However, the repo wasn’t the rate the determined what banks could borrow as a “last resort”. Repo borrowing – overnight money borrowed by banks from the RBI using government securities as collateral – was unlimited before July, and suddenly, the RBI restricted Repo borrowing to less than Rs. 40,000 cr., or 0.5% of the liabilities of the banking system.
The defining rate then was something called the Marginal Standing Facility. This was at a higher rate – initially, at a 1% higher rate than repo. In September, it went to a high of 3% above repo, and even that had limits.
The graph shows how repo borrowing went to nearly 2 trillion rupees (2 lakh crore) and then was capped at about 40K crore for the rest of the year. MSF was then used – and for a while it was 10.25% - while rates exploded in the call markets.
Money market rates went berserk between July and September, until the MSF was brought back down to 1% above the repo rate, and in October, a new “term repo” introduced to allow banks to borrow at rates that they bid for, for a 14 day term.
This has reduced overnight repo borrowing somewhat, but rates remain around the 8.5% levels at the end of the year.
Money Supply, Bank Credit, and Growth Rates
We saw things change this year with Credit and Deposits both slowing. Deposit growth has recovered slightly but credit, and specifically incremental credit has fallen hugely.
The Crash of the Rupee
The Rupee saw a massive downmove this year. From the Rs. 55 levels, the rupee went to Rs. 68 to the USD, and then rebounded back to Rs. 62.
This has been a tough year. In June, we saw world markets in turmoil after the US Fed Governor, Ben Bernanke announced that they may have to taper the massive purchases they were doing every month in the US markets. The Rupee promptly went down 10%, to Rs. 60 per USD.
And then came July and August, when, on the back of massive foreign investor outflow, we saw the rupee fall to 68, and forex reserves at the RBI fall over $20 billion. Then after Subbarao’s term at the helm came to an end, Raghuram Rajan came in an introduced the FCNR swap, where banks could get NRI deposits and hedge the currency risk with RBI (by giving RBI the dollars instead of selling them in the market). The hedge was at a far lower cost of 3.5% per year, (versus 8.5% in the market).
This brought in a lot of dollars ($34 billion) but at the same time we saw oil refiners buying dollars directly from the RBI, which, after including direct dollar sales in the market, depleted RBI currency reserves by $10 billion, for a net addition of $24 billion.
Meanwhile Gold lost 30% and boom, that took out much of the growth in the currency reserve.
But for the year, reserves remained flat, ending at $295 billion.
Remember the RBI still has an obligation to return $34 billion through the long end of the FCNR swap, so net of that, we’ve actually lost reserves.
Inflation
Wholesale Price Inflation dipped to less than 5% but has come back to end at even higher than last year. This uptrend is largely on food and fuel inflation. Consumer prices, though, never really came down too much – inflation remained above 9% and closed at over 11% in November, the highest ever for this index.
GDP
GDP Growth went down to below 5% this year, the lowest in a very very long time. (See full analysis of the Q2 GDP Numbers) Recovering slightly to 4.8% in Q2 2013-14, it still is way below rates. Inflation showed its impact, with nominal growth going to +13% - the difference being inflation’s effect on the economy.
The NSEL Scam
While we go on about markets, a big black mark has been the NSEL scam. At Capital Mind, we wrote extensively about it, on the site and on twitter. (Read the explaining article and all else about it)
The scam was about how an exchange defaulted. The details are there, but the summary is that what people were told was an exchange eventually wasn’t. It wasn’t regulated right, and it was allowed to keep offering products that effectively was about some people (24 entities) on one side borrowing money from 17,000 people on the other side. When it was time to repay, they just found more people to borrow from, and the exchange was complicit in this deal.
The top exchange officials are in jail. The founding company, Financial Technologies, continues to trade at what is a 80% lower figure than it used to before the scandal came out. There are chargesheets and court cases and a lot of legal wrangling to look forward to (not!) but the thing is: the money has gone, and is unlikely to be recovered in any real way. The shame is in the speed of our official reaction to this scandal, even when all facts were known.
The failure of trust will mark 2013 as a horrible year for the market structure and will come back to haunt us in later days. For now, though, it has been forgotten; but if we should ever come to a crisis situation with any exchange in future, there is no doubt that recovering your money is not the first priority of the powers that be.
What about 2014?
I don’t like to predict stuff, honestly. It’s better to position yourself for moves than otherwise. We’ve explained why our case for the market is bullish for the oncoming year, at least initially:
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Inflation will come down, at least in the first few months, as food prices have already settled.
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We’re seeing some interest in** small caps and midcaps**, which have outperformed the Nifty since September.
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Foreign investor interest continues even after the US Taper announcement.
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As elections come close we might see a revival of investor and manufacturer sentiment.
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Volumes are not at an all time high, which would be usual for a bullish top. This time, if anything, we are likely to see a mad rush to the markets again.
The major risks are:
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Foreign investors pull out. This could take the rupee into a downward spiral and eventually create inflation right back.
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The** fiscal deficit goes out of control**. Already, we’ve reached a point where government spending has taken the deficit to over 84% of the annual deficit, and we only have data till October.
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There is a realty collapse or a massive rise in defaults. This could be related to interest rates, but will cripple the banking system.
At some level, a new government might bring in the feeling of stability, if there is a simple majority. This will hugely raise sentiment, and at Capital Mind we’re positioning our portfolio to take advantage. Considering the rally will largely be led by retail investors (foreign investors have already done their bit) we will focus on the mid-cap and small-cap stocks where we believe there is a tremendous opportunity lying ahead. In the premium section, we’ll analyse stocks and sectors in more detail in the days ahead.
At Capital Mind Premium we’ll see a lot more interesting things.
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Our proprietary data tool, that shows us a lot of the charts that we write about, updated regularly, available on the mobile and the web! We’re running a little late but might be able to get a beta out next month.
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Optionalysis, our Derivatives notes, is coming your way in January. (Exact dates to come later).
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More fantastic data and visualizations through Capital Mind’s interface, and webinars to explain how you can use them
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Our own stock and derivatives portfolios. This is an educative mechanism, to analyse stocks and take positions in them so we can back up our analysis with real money. However, these aren’t supposed to be tips or recommendations of any sort.
See all the posts in Premium at https://content.capitalmind.in/premium/.
Have a Fantastic 2014, folks!
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Disclaimer
Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.
Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.
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