Tuesday, 30 October 2012

Deciphering RBI's Monetary Policy - 30th October 2012

Metcon Finance's Take on the RBI's Monetary Policy Announcement
Tuesday, 30th October, 2012
Mumbai, India

Today the Reserve Bank of India (RBI) cut the CRR by 25 bps to 4.25% and left traders, investors and analysts disappointed with no change in the RBI’s interest rate (Repo Rate) at 8%. While the Equity & Currency markets have not seen this in good light, we at Metcon Finance are analyzing Governor Subbarao’s statement probably more carefully than we ever have.

He mentioned that inflation will continue to be sticky at 7-8% which will be mainly driven by supply-side constraints and high commodity prices. He said that the RBI expects commodity rates to continue to remain high and probably even inch up, which we believe is an indication of a high likelihood of further easing by Japan/ECB/China along with the US FED’s QE3. As the US Presidential elections take place next week, it is only obvious and absolutely necessary that we also understand the RBI’s as well as GoI’s view with respect to the same. After speaking to Wealth managers, Portfolio Managers for Institutions as well as HNI’s, we understand that markets would cheer Governor Mitt Romney’s victory over President Barack Obama as the latter has, as felt by many economists across the United States, failed to revive the American economy and consequently also dented the progress of various nations in strengthening their respective economies.

The signalling by RBI Governor Subbarao that the commodity prices will be sticky also points to strong American Equity markets till the end of 2012, where we expect the S&P 500 to make new highs and consequently Nifty to touch 6100 levels. However after touching the new high, we expect that between January and March we may witness a 6-10% correction in the American Equity markets which may lead to a fall also in the Indian Equity Markets by 7-10%.We expect the Nifty to find support between 5520 and 5750. Subbarao mentioned that we can expect to see some easing in the Monetary policy between January & March, which we believe would be a time where either American & European markets correct or core inflation in India eases to sub 5% levels or both.

On the policies and economic front, we expect the Indian Government to outperform people’s expectations, especially in the Infrastructure, Telecom, SME & Mining segments. The Cabinet reshuffling and appointment of younger and more vibrant leaders points at a training mode of Rahul Gandhi's favourites for 18 months, the duration remaining for the 2014 National General elections. According to a recent poll by CNN-IBN, people would prefer Rahul Gandhi over Manmohan Singh as the Congress' Prime Ministerial candidate, and the reshuffling on Sunday only confirms the similarity in the voters' views and the Congress' Top Masterminds.

Coming to the Indian Rupee, it is again beginning to see some weakness after jumping nearly 10% in 5 weeks. However, we are of the opinion that the US Dollar has strong resistance between 54.30 and 55.50 and the UPA Government's newly found aggression in implementing policies, change in stance of the RBI gradually towards growth, lower Oil prices and change in investor sentiment will help the Rupee become stable at 50-52 levels in the next 2-3 months.

The above views indicate a fairly bullish stance maintained by us in the short-to-medium term, however, we do not rule out the possibility of Nifty falling to 5250, in case our assumptions fall short or in case another speed bump comes up in Europe’s path of recovery.

Shaurya Mehta
Metcon Finance Ltd.

Saturday, 19 May 2012

Have the World Markets got Facebooked?

Have the World Markets got 
“$104 Billion”! That is the Valuation which the Social Networking Giant “Facebook” has received after it decided to go public. Facebook has got listed on the NASDAQ on Friday 18th May 2012 under the symbol “FB”.

The Menlo Park, California-based company has managed to sell 421.2 million shares, up from 337.4 million shares it previously said it would offer at the upper limit of its price band of $34-$38 which was actually an increase from $28-$35 on growing demand for the Social Network’s shares. The IPO was oversubscribed on the very first day and hence the company pushed the price up on the IPO’s second day thereby creating a technology company with a historic IPO valuation at 25x of its revenues.

At $16 billion, Facebook has managed to become the largest Tech IPO ever and the 7th largest IPO in the World.

Big Question – So what does this have to do with the World markets?

The whopping $16 billion IPO of Facebook, will not only permanently engage $16 billion of liquidity from the Equities market but also actually absorb over $150 billion of liquidity from the Derivatives market. Hence, a permanent shortage of $16 billion from the Equities market and over $150 billion in the Futures Derivatives market as brokers require only 5-15% of margin for Derivatives.

Can this get a little freakier?

To be oversubscribed on the 2nd day itself, we at Metcon Finance assume that the IPO would have been subscribed around 20 times by the time it closed. (Dealbook reported 25 times in Asia, our estimates are conservative) This means that over $300 billion was required to be locked in for a week. Now how do you, as an Institutional Investor bring in that much of liquidity when that is invested in various regions of the world including the US stocks & commodities? Find the answer below.

The recent fall in the Global Stock Markets for e.g. the NASDAQ, the German DAX, the French CAC, Hong Kong’s Hang Seng, the Indian Nifty, the Japanese Nikkei and major global indices has ranged between 8-10% only in the month of May, which comprises of only 14 trading sessions till now. While some analysts pointed out to lack of visibility in the revenue of Facebook, the oversubscription to the Social Giant’s IPO proves that many investors and clients saw value in buying a part of the network that they or 900 million other users become a part of every day, week or month. And $300 billion translates into more than $2 trillion and in May itself, global markets have lost roughly $4 trillion in market cap.

While we do not want to underestimate the impact of the European crisis, we do believe that the oversubscription required investments in US Dollars and hence the demand for the currency increased, leading to investors pulling out of investments made abroad. This in turn led to a sudden fall in share prices and a spike in the Greenback. In short, we believe that the Facebook IPO is also a significant reason for many individual stocks and indices falling in the last 2 weeks across US, Europe and countries such as India, China, HK, South Korea among others as Global markets take cues from each other.

However, we believe that once the listing gets done, we will see liquidity coming back to the markets as investors would have been allotted the shares of the company, leading to stocks and global indices recovering, the US dollar correcting and oil prices increasing.
Our analysis above is backed by historical data of the 3 Largest IPOs in US History – Visa, Enel SpA and General Motors. We analyzed the behavior of the NASDAQ before, on and after the day of listing of these 3 Stocks.

 #1 VISA – Visa announced on February 25, 2008 that it would go ahead with an IPO of 50% of its shares on March 18, 2008. Visa sold 406 million shares at US$44 per share ($2 above the high end of the expected $37–42 pricing range), raising US$17.9 billion in the largest initial public offering in U.S. history.

On March 20, 2008, the IPO underwriters (including JP Morgan, Goldman Sachs & Co., Banc of America Securities LLC, Citi, HSBC, Merrill Lynch & Co., UBS Investment Bank and Wachovia Securities) exercised their overallotment option, purchasing an additional 40.6 million shares, bringing Visa's total IPO share count to 446.6 million, and bringing the total proceeds to US$19.1 billion. Visa was expected to debut at a price of $37 to $42 per share, but there was enough initial interest to price the deal at $44 on Mar. 18. On Mar. 19, Visa, under the stock ticker "V," opened on the New York Stock Exchange at 59.50 per share, and finished the session 29% above the offering price, at 56.86.

During the time frame of January 15th 2008 to 17th March 2008 till the IPO and listing process was going on, the NASDAQ fell from 2382 to 2177 in a time frame of around 35 days which is 205 points or -8.6%! After the IPO, the index moved from 2177 to 2522 an increase of +15.85% in a span of just two months as liquidity returned to other stocks and Futures & Options in the market.

Co-incidence? Or is the effect of liquidity being released back into markets?

#2 ENEL SpA – This Italian power company was publicly listed on the New York Stock Exchange and in Europe after the Italian Government liberalized the power industry in 1999. Enel SpA’s IPO date debuted on November 01, 1999 and got a valuation of $16.45 billion making it the largest IPO till Visa’s IPO in 2008.

With the range span from mid-September 1999 to mid-October 1999, the NASDAQ fell almost 200 points from 2868 – 2670. After the IPO, the company got listed and within two months the Nasdaq composite Index surged to +57.49%.

While such a spike up is definitely not just because of liquidity emerging post the Enel SpA IPO but it definitely may have been a contributing factor, wouldn’t it?

#3 General Motors – On July 10, 2009, with financing partially provided by the US Government, General Motors emerged from reorganization. GM was re-listed on the NYSE on November 17, 2010, setting the record for the 3rd largest IPO in US history with a value of $15.7 billion (of course, now that rank has been bagged by Facebook).
GM sold 478 million common shares at $33 each, raising $15.77 billion, as well as $4.35 billion in preferred shares, more than the initially planned $4 billion.

From 8th November to 17th November of 2010, when the IPO offer got completed, the NASDAQ fell from 2580 – 2469, i.e. -4.30% in a time frame of just 7 days. After the listing, the index moved from 2469 – 2769 an increase of +12.17% in a span of 2 months.

Coming back to the epic & celebrated IPO of Facebook and looking at it from the perspective of Visa, Enel SpA and GM, look what we have:

From the highs of 3134 on March 27, 2012, the NASDAQ has corrected by 10.2% to 2813 on May 17.

Now that Facebook has got listed, the $104 billion question: Do we have a 10%+ move soon coming up?

Shaurya Mehta
Metcon Finance Ltd.
Mumbai, India