July IIP makes consensus look silly

The following para shows how hard it is to predict. June IIP came at around 7%, and consensus quickly became 7%.  This is an excerpt from a broking firm’s report.

July industrial production rose 13.8%, higher than our and consensus estimates (7.0%; Consensus 7.5%). Similar to last month, where incidentally the numbers were revised down from 7.1% to 5.8%, we were expecting single-digit growth in July due to the fading of the base effect. (A quick re-cap, industrial growth which had averaged 0.9% during Oct08-May09 picked up in Jun09 with growth during Jun09-Mar10 averaging 12.1%).

Also, the government data has to be taken with a pinch of salt. The July IIP is principally high due to a sharp 63% jump in capital goods production. Now 63% is steep. Orderbooks of cap goods companies have been going up for the last 2 quarters, but that sharp jump in production? hard to believe.

My own view wasnt too different. I thot IIP should be staying under 10% for the same reason as stated below. Also, with such a high inflation, I am finding it hard to believe final consumer demand can grow at > 10%. Can capex cycle be so strong as to keep IIP above 10% on its own? out of my depth on that one

The concept of upside risk

Quite a few broker reports tend to have this line ‘xyz can lead to an upside risk’.  If you are buying long, hard to see how doing better is a risk. For a derivative strategy, it might be.

I suppose brokers like these wont like the Sortino ratio too much, which has become quite popular in evaluating mutual fund performance, compared to the older Sharpe ratio.

See this line from a recent report on Havells..

Successful turnaround of Sylvania is an upside risk

Example of trendline forecasting

Reactions to the May IIP data, which showed a 11.5% growth, have been uniformly same. All brokers are calling it – ‘below expectations’.  Which it seems was 16%.  Really, what are our broking economists thinking? Just because for 4-5 months IIP grew at strong growth rates, so now 16% becomes an expectation. Tho I must say, it is a tough job. There is really no tool for form expectations on a monthly basis, but they are forced to, to keep the client service happy

Here’s a note from a report, and the tone is the same in all of them..

India released industrial production figures for May at 11.5% y-o-y, disappointing consensus expectations at 16% yo-
y. We were surprised by the result, too, given that the recent data flow is pointing to strong demand. This represents
a sequential decline of 3.9% m-o-m sa. If anything, we think this disappointing figure is further evidence that capacity
constraints in the economy may be capping growth.

The Science of Investing-1

This is a new category of posts , where we will pick new interesting stuff anlaysts do.

This one is from one of foreign brokers. on HUL. The broker says there a 15% chance of HUL tanking to its lows of the last decade. We are……ahem… impressed.  Full marks for trying ..

HUL scenarios