The Daily Intelligence Briefing: Focus on IndiaMay19

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Daily Intelligence Briefing

May 19, 2014

After India’s elections, many observers are pointing to China as the new government’s model for growth. But for investors, Japan might be more relevant in the near term. Japan’s election’s in late 2013 set the stage for the “Abe Trade” of long stocks, short bonds, and short the yen. This year, India’s elections support a slightly different “Modi Trade” of long stocks and long the rupee.

Much like Shinzo Abe in Japan just over a year ago, Narendra Modi has been swept into power with a landslide victory and an ambitious agenda to reform India’s sclerotic policymaking institutions, replace the country’s aging infrastructure, and cut through decades of bureaucratic red tape. His mandate is personal ? a fourth of the BJP’s supporters voted for him rather than the party ?  and expectations are high, just as for Abe. And like Japan, sputtering economic growth is adding pressure to open up the economy to more foreign competition. All of this can be good for India’s equities, which are already up smartly.

But where Japan had a deflation problem, India is grappling with high inflation, which will complicate the new government’s agenda. Soon after Abe took  power, the Bank of Japan launched a massive program of quantitative easing as a complement to fiscal stimulus, which led to a dramatically weaker yen. The Bank of India, however, is tightening rates under its new governor, Raghuram Rajan, who took over last September with his own mandate to curtail inflation, and which is leading to a stronger rupee.

THE “MODI” TRADE: LONG STOCKS AND LONG THE RUPEESource: Bloomberg, McAlinden Research

Today’s Issue Cluster: India

• A landslide victory gives an electoral mandate to the new government, the first in 30 years to have an outright majority in parliament
• A fourth of supporters voted for Narendra Modi rather than the party; the US is lifting the travel ban on Modi as a head of state
• The new government does not have an outright majority in the upper legislative chamber but has a potential ally in head of the central bank
• As governor of Gujarat, Modi boosted infrastructure spending and lifted regulations … more of the same expected for India as a whole
• The Bank of India’s reform panel says the government should cut its ownership of state banks below 50% so investors can push through change
• Half of India’s population lives below the “empowerment line” of self-sufficiency for basic needs; subsides fill the gap
• The former government sought to boost manufacturing to 25% of GDP but it fell to 15%
• Agriculture’s share of GDP is falling but is increasing as a share of the labor force, absent urban job opportunities
• A new push for value-added industry can be good for India’s steelmakers but bad for the already over-supplied global steel market

Best of the Rest

China  The boom in e-commerce require adding warehouse space equivalent to 2/3 the size of Taiwan

Google  The EU parliament wants to tighten regulations on Google as the EU President after elections later this month ho

Rail  US grain stocks are the largest in years because of railroad backlogs and bottlenecks … farmers say oil shipments are getting favored instead

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McAlinden Research Partners, a division of Catalpa Capital Advisors, provides daily, weekly, and other periodic reports that identify actionable investment themes early. As students of change, we specialize in the identification of critical inflection points for asset classes, industry groups, and other clusters of securities. MRP reports complement the individual investment styles of clients by guiding them to where they can find investment opportunities. MRP clients include pension funds, sovereign wealth funds, private banks, asset managers and wealth advisors from around the world.

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