This is a graphical look at some of the financial events of the past two years and their impact on Indian investors. Some of the important events that took place during this period have been marked on the timelines of the charts.
1. On July 31, 2012, P Chidambaram took charge of the finance portfolio
2. On September 1, 2012, the US Federal Reserve started its Quantitative Easing 3 (QE3) Program pumping out extra liquidity of $85 billion per month
3. In May-June 2013, the US Federal Reserve started talking about tapering off QE3
4. On September 4, 2013, Raghuram Rajan took over
The stock indices have been normalised to make them more easily comparable with the initial values on January 2, 2012 set at 100. The USD-INR data has been inverted to reflect the rupee weakening as the USD gains in value.
So let's see what's happened to various Indian assets in the period between January 2012 and September 15, 2013.
The Nifty's up 12 per cent net since P Chidambaram took charge. The big jump came after QE3 started. The market has lost ground after fears of tapering surfaced and it has made a sharp recovery in the short time since Rajan took charge.
Now let's take a look at the rupee-dollar equation. The chart has been reverse-scaled. Nothing much happened to the USD-INR rate when PC took charge. It ranged along between 55-56. When QE3 started, the rupee went up temporarily before settling down again. It collapsed to record lows once fears of tapering came to the fore. When Rajan took charge, it was down to below 68. It has since made a sharp recovery.
The FII attitude is also worth examining.
There was a small pick up in sentiment when PC took charge. Buying increased immediately following the launch of QE3. It started coming down in July 2013 when tapering fears became marked. There's been a revival in buying in September after Rajan took charge.
What's happened to key sectors of the economy?
Let's take a look.
First, banking since that is the sector with the largest weight in the Nifty.
Somewhat like an exaggerated version of the Nifty. Huge surge in the bank Nifty after QE3 started. A steep fall once talk of tapering started. A big bounce once the new boss took charge at the RBI. What about IT? That has a big weight also in the indices and it is sensitive to the rupee-dollar rate.
The inverse correlation to the rupee strength shows up clearly enough. The industry took off once the rupee started weakening. It peaked out when the rupee hit its weakest point so far, in late August/ early September.
The next key industry is tricky- Energy.
The CNX Energy index consists of a mix of oil and gas producers -- ONGC, Reliance and Cairn, and refiners -- Reliance (again), BPCL, IOC, plus power utilites like NTPC, Rpower, Tata Power and speciality companies like gas transporter Gail and transmission monopoly, Powergrid. Only the producers have done reasonably well in the past two years but ONGC and Reliance have huge weights. The fortunes of these companies depend on a combination of fuel prices (crude and coal), rupee-dollar relationships, and government policy that forces many of them to supply oil, gas, refined products and power at controlled prices. The weak rupee has forced some reform.
Let's look at one consumption bellweather next, in FMCG.
A rock-solid performance that justifies the FMCG industry's reputation as the greatest defensive sector. Almost disconnected from all the events that have so obviously affected the broad market. Over 70 per cent return since January 2012.
Now, another consumption driven industry -- the cyclical automobiles.
Automobiles and ancillaries have done surprisingly well in terms of capital gains. Surprising because there was a 9-month period when sales reduced month on month. That losing streak was only broken in August 2013. Maruti has gained from a weaker yen. Tata Motors' subsidiary JLR has done well. Exports might look up in general due to the weaker rupee. Still, the industry has effectively range-traded through several months.
Sadly Industrial metals have not had much of a performance. Weak global demand and slow domestic demand have pushed prices down. Power shortages have pushed costs up. Will the weaker rupee and recovering global demand trigger a rebound across these industries?
Another industry that has struggled during this phase is real estate.
High interest costs, lower demand for commercial space and residential as well. Also the RBI cutting off funding for incomplete project by several policy measures. Consensus opinion seems to be that things will get worse and prices will correct further before demand picks up. Note the roller-coaster nature of the industry -- it was up massively in late 2012, and early 2013.
After this, one could look at another defensive in pharma.
The inverse correlation to the rupee has led to a lot of speculative investment. Several big exporters are running into trouble though, with the US FDA (Food and Drug Administration). Also the Indian government is trying to bring more drugs under the drug pricing control order (DPCO) regime. So there could be some downside.
Finally, the sector with the widest impact on economic development -- infrastructure.
This actually covers multiple industries ranging from construction to power, telecom, capital goods, aviation, shipping, specialist financiers, etc.
Unsurprisingly, it's gone nowhere in the recent past. However, in the past three months, the Cabinet Committee on Investment has cleared some Rs 11 lakh-crore worth of blocked projects. But it will take time for those to raise funding and start implementation. It's unlikely that we'll see a meaningful improvement in GDP growth until infrastructure gets back on track.
So, what does all this mean for the investor?
FMCG and Pharma remain solid defensive sectors, which could do well regardless of who's in charge of what portfolio and the overall economic situation. IT (like pharma) will surely gain if the rupee weakens further. Automobiles may be rebounding off a cyclical low and ditto metals. Financial sector stocks are being buoyed up by hope that Rajan will change the game. Real estate is in dreadful shape and so is infrastructure. The broad Nifty has done better than most sectoral indices.
This story first appeared in the November 2013 issue of Wealth Insight.