Update HDFC Bank (HDB)

Another day, another interest rate increase from an emerging economy central bank.

On January 25, it was the turn of the Reserve Bank of India. The bank raised its benchmark repurchase rate to 6.5% from 6.25%. The Reserve Bank of India raised interest rates six times in 2010 and the benchmark rate is now at a two-year high.

I don’t think the Reserve Bank of India is done either. The bank’s most recent projections are pointing to inflation of 7% by the end of the country’s fiscal year on March 31. That’s a huge increase from earlier projections of 5.5% inflation. (The bank is also calling for GDP growth of 8.5% for the year that ends in March. That’s unchanged from earlier projections.)

And the Reserve Bank’s projection is very likely low. Inflation in wholesale prices, India’s preferred inflation measure, hit an annual rate of 8.4% in December.

Not surprisingly Indian stocks fell on the news of the interest rate increase with the Mumbai market’s Sensex 30 Index closing down 1%. The drop was widespread—Infosys Technologies fell 0.8%, for example–but property and bank stocks were among the shares suffering the biggest declines. Read more

At the end of October China’s Communist Party formally endorsed the country’s new12^th five-year economic plan. For 2011-2015 the plan envisions changing China from the world’s factory to the world’s market. During this period, China’s leaders intend to change the economy from one driven by exports to one focused on the domestic consumer.

I think investors should pursue something like that transformation in their stock portfolios. Most investors who have put money into the world’s emerging economies have bought the big export companies in those economies: a Vale (VALE) or Petrobras (PBR) in Brazil, an Infosys (INFY) or Coal India in India, in China Petrochina  (PTR) or the Lenovo Group (LNVGY). Investors who don’t own these companies have at least heard of them.

But I think it’s time to develop your own five-year plan that shifts some of the money in your portfolio that you’ve allocated to overseas equities from export driven companies to companies that focus on the domestic markets in a Brazil or India or China or …. You don’t need to abandon those exporting powerhouses all at once or even at all. But you do need to rebalance your portfolio to include more companies that focus on domestic growth.

Let me give you the two reasons for undertaking these rebalancing. And then give you a short list of stocks that you should consider as potential tools for doing that rebalancing. Read more

Expectations for higher gold prices are getting baked into India’s huge jewelry market

A minor sign that inflation expectations are starting to become embedded in economies and markets.

Minor but important. Especially for investors in gold.

Typically, when gold prices rise, the demand for physical gold from the jewelry market falls. Buyers of gold for jewelry and the buyers of gold jewelry itself are traditionally very price sensitive. This is particularly true in India, the world’s largest market for gold jewelry and the source of one-eighth of global gold demand. Buyers there simply postpone purchases or buy less when prices rise.

Except they’re not doing any such thing right now.

Even though gold prices are at or near all time highs at $1,400 an ounce (not adjusting for inflation), India buyers haven’t pulled back.

Reports from Mumbai and London put gold buying for the Diwali festival at 25% above last year’s level. Hindus believe that buying gold on Diwali attracts business and prosperity during the year.

So the question is Why?

One theory, and this makes sense to me, is that Indian buyers have become convinced that gold is just headed higher so there’s no reason to put off buying at what will be, in retrospect, today’s low prices. This is a very good description of inflationary expectations at work: Expecting higher prices tomorrow, you buy today, just about guaranteeing the higher prices tomorrow that you expected.

Gold investors outside India should note that Diwali is followed by wedding season in India. During those months gold buying is strong as parents buy gold jewelry as part of a daughter’s marriage dowry.

If demand for physical gold isn’t dropping with higher prices, that removes one traditional restraint on rallies in the shiny metal.

Which side of the currency wars will India join?

Is India next?

Will India be the next country to join the global currency wars? If you’re counting votes at the upcoming G20 meetings, this isn’t a minor issue. India could make the difference between agreement on a unified global response and go-it-alone chaos.

On October 15 Governor Duvvuri Subbarao of the Reserve Bank of India said that the bank may intervene “if inflows are lumpy and volatile” and disrupt the economy. In the last month the Indian rupee has climbed 5.2% as overseas cash has flooded into Indian financial markets. So far this year overseas investors have put $23 billion into Indian shares and bought $10 billion in rupee-denominated debt, according to Bloomberg.

But you know how the drill goes? A rising local currency means trouble for Indian exporters. Before the bank’s comments Infosys Technologies, India’s second-largest software company, had called on the Reserve Bank of India to act on the rupee. “We’ve seen the rupee go from 52 to 39 and back and forth,” Infosys CFO V. Balakrishnan said on October 15. “It will kill the whole export industry. The RBI has no choice but to intervene at some point in time like every other country. I’m not the RBI governor, but if I was, I’d do it now.”

India’s trade deficit hit $13 billion in August. That’s near the record trade deficit of $15.8 billion the country set in 2008.

Intervention by the Reserve Bank of India would be quite a turnaround for the bank. Read more

Russia’s ban on wheat exports sets the commodity markets on fire

On August 5, Russia banned grain exports for the rest of the year. Drought has destroyed about 20% of the wheat crop of one of the world’s top wheat exporters. The ban will run from August 15 until December 31. At a minimum.

Wheat prices, already up 70% this summer, climbed again. Wheat was “up” another 8.3% on the Chicago Broad of trade that day.

The ban on Russian exports (Russia exported 21.4 million metric tons of wheat in 2009.) comes on top of prior forecasts for a smaller than expected U.S. corn harvest, and smaller than expected plantings of wheat in Canada due to a wet spring.

Wheat farmers in the United States, Argentina, and Australia will pick up part of the slack—as well as the benefit of higher prices. The wheat harvests in Canada and the European Union are not forecast to be particularly abundant this year.

But the ban on Russian exports isn’t the end of the story. On August 6 Russian Prime Minister Vladimir Putin fueled the speculation that other countries would also end exports when he said that Kazakhstan and Belarus should join Russia’s ban. Kazakhstan exported 7.5 million tons in the 12 months that ended on June 30 and Belarus shipped 400,000 tons, according to the U.S. Department of Agriculture. Another wheat exporter in the area, Ukraine, could well refuse to follow Russia’s lead because of political tensions between the two countries. But formal ban or not, the drought and wildfires that have devastated Russia’s grain crop are likely to reduce supplies from the Ukraine too. That country exported 9.2 million tons of wheat in the 12 months that ended in June.

Global wheat stockpiles aren’t anywhere near danger levels. The forecast now is for the bad weather and the export bans to cut world wheat stockpiles by 2.5% to 192 million tons, according to the International Grains Council.

 But the bans on exports by individual countries have more to do with internal domestic politics than any fear that the world is running out of wheat. Individual countries are trying to head off a surge in food prices that would create a wave of domestic political protest. Peak wheat prices of 13.50 a bushel in February 2008 set off food riots in Egypt, for example. Domestic wheat prices in Russia climbed 19% in the week before the country imposed its export ban.

And the bans have set off a scramble for supply and that has led to the wild surge in wheat and other grain prices on commodity exchanges. For example, Indonesia and Japan, Asia’s two biggest wheat buyers, have started to scour the markets for alternative supplies from the United States, Australia, and Argentina

That has created a psychology of shortage among global commodity traders who are now seeing commodity disasters everywhere. For example on Wednesday August 4 agricultural stocks led the Shanghai Composite Index to a 0.4% gain on speculation that recent floods will lead to a decline in the rice harvest—and higher rice prices. Chinese vice premier Hui Liangyu called on local authorities to increase rice planting after foods damaged more than 7 million hectares of farmland, according to the Xinhua News Agency on August 4.

It’s important to recognize two things about a commodity price surge like this. Read more