The Indian Stock markets continue to inch up while the corporate earnings continue to be muted. Fresh allocation of foreign capital to Asia ex –Japan funds is leading to huge money inflows from foreign investors. So far this year, India has already received more than ten billion dollars of FII money. With interest coming back in the Chinese market, Leap of Faith believes there could be more allocation to BRIC/ emerging market funds leading to further inflows.
While the infrastructure story is taking its time to play out, consumption activity is seeing unprecedented growth. Leap of Faith visited High Street Phoenix, a high end south Mumbai mall over the weekend and was surprised to see the sea of people present in the premises. From apparels to consumer durables to mobile phones to Movie shows, it seems the great Indian consumer is splurging like never before. There were long queues to get inside Big Bazaar, the discount retail store from Pantaloon Retail India which occupies 100,000 square feet of retail space in this mall. After having been turned away from fine dining places because of long wait lists, Leap of faith had to contend with a takeaway at MacDonalds, because there was no place to sit!
The high end section of the mall, Palladium, has become home to the biggest luxury brands in the world with Diesel, Canali and Guess opening their stores in early 2010. As the 400 room luxury Hotel Shangri La gets inaugurated next quarter, the footfalls to the mall would only increase.
As more and more Indians enter the middle class and start living the ‘American Dream’, the demand for cars, premium housing, retail spaces, high end gadgets and tourism is only going to increase. Phoenix Mills plans to replicate this success in other Indian metros with expected operational retail space of 25 mn square feet in next four years. With a new revenue sharing model instead of an outright lease one, Phoenix mills is highly geared to capitalize on the booming Indian retail story. This got reflected in the company’s earnings which grew by 60% on yoy basis this quarter. Leap of Faith believes Pantaloon Retail and Phoenix Mills remain the best bet on the booming India consumption story and would keep both as a core part of the Model portfolio.
While consumption booms, the commodity complex continues to be under pressure because of subdued demand from China. China's imports of industrial commodities is slowing as export growth slows down. That is going to have a bearing on industrial metal prices across the world. The surplus steel making capacity in China is going to keep steel prices depressed in the world market at least for the next few quarters. Arcelor Mittal in its commentary this quarter, pointed towards a softer third quarter with pressure also coming from muted European steel demand. The positive side of softer commodity prices is that it would ease margin pressure on manufacturing companies in India. It is to be noted that raw material price and interest cost increases have been the biggest source of margin declines for India Companies this quarter.
In US, the corporate earnings have been above consensus expectations. However there have been big concerns whether the jobless recovery can continue for a long time. While concerns have increased about fresh jitters coming out of Europe, so has the expectation that a new stimulus package is coming. The equity markets there have already started discounting the coming monetary and fiscal stimulus package and another round of quantitative easing looks imminent. Leap of faith would believe that incremental benefits of further quantitative easing would be minimal, though it could take equity markets even higher in the short term.
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