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Thursday, June 11, 2015

Weather is turning cold and windy

"The law condemns and punishes only actions within certain definite and narrow limits; it thereby justifies, in a way, all similar actions that lie outside those limits."

- Leo Tolstoy (Russian, 1828-1910)

Word for the day

Quidnunc (n)

Person who is eager to know the latest news and gossip; a gossip or busybody.

(Source: Dictionary.com)

Malice towards none

Though the flyers must be loving it, but is the price war in skies really good for the health of the sector?

Couple of more Kingfishers and the rest will kill the pessangers.

Weather is turning cold and windy

The infrastructure project lender IDFC has taken lead in implementing the latest RBI mandate for more effective handling of financially stressed infra assets. It has evicted the extant management of a Chhattisgarh based power producer SV Power which had repeatedly defaulted on its debt obligations.

In my view, it is a strong message to the delinquent companies and defaulting managements. A similar action in time could perhaps saved Kingfisher Airlines and other businesses in similar financial conditions.

It could be a potent deterrent for promoters who are chronic defaulter and have been taking advantage of the lenient enforcement norms in past many decades. Some steel producers, for example, have availed a corporate debt restructuring (CDR) package virtually in all business cycles.

However, by no means this would be sufficient measure, without a stringent project monitoring, money laundering regulation and fast track criminal prosecution of willful defaulters, this practice may only solve a part of the problem.

A suitable bankruptcy law that allows rehabilitation/closure of genuinely failed businesses without any stigma to the promoter of the project could help early detection and cure of financial stress.

It is an unproven but widely acknowledged theory that many unscrupulous promoters use a variety of means to escalate the cost of the project and virtually manage to get away with little or no equity contribution of their own. In such circumstances their personal stakes in the subject project are minimalistic. While they stand to gain most from the success of the project, they have little to lose in case the project runs into rough weather.

A large number of stressed road projects under PPP regime and power/steel plants based on captive mine allocations could be provide useful case studies to evaluate this proposition.

The bankruptcy and banking regulations therefore must be supplemented by a strong criminal prosecution regime for such unscrupulous businessmen.

The report of Nomura India about their trip in Europe to market Indian financial sector stocks makes some interesting reading. As per the report there was very little interest in PSU banks, expect SBI, amongst European investors. Investors were relatively more comfortable playing cyclical recovery cycle through private banks like Axis/Yes. It is generally felt that smaller PSU banks will find raising capital (for BASEL compliance) very difficult and there is little clarity as to see how they will break the vicious cycle.

German 10yr bond yields have touched 1% mark for the first time after September 2014. Gold, US yields and USD have also shown soft trend in recent weeks. No one is rushing to safe havens for now.

Malaysian Ringgit recently touched nine year low. Emerging market equities have cracked badly. Chinese market are in bubble. It's certainly cold and windy outside

Thursday, October 9, 2014

It's windy, wet and depressing out there

Thought for the day

”All generalizations are false, including this one."

- Mark Twain (American, 1835-1910)

Word for the day

Foremost (Adj, Adv)

First in place, order, rank, etc.

(Source: Dictionary.com)

Teaser for the day

Lalu Prasad Yadav was given bail after 10months. So may be the case with J. Jayalalithaa.

So what is the law here?

Should we have a definite law for bail in different cases, or it should continue to be a matter of discretion of the presiding judge?

It's windy, wet and depressing out there

The weather in global markets has suddenly turned grey. The sunshine has disappeared. It's all windy and wet out there. The chill is not biting yet.

The Absolute Return Letter for the month of October puts the mood succinctly, and I take liberty to quote - "When I look at the world passing by outside my window, there is little doubt in my mind that the world is not as safe today as it was six months ago. For starters we have just had a very important referendum in Scotland. We now know the outcome but not yet the full implications. In about 3 years – unless Labour regains

the control of the UK parliament – we will have an even more important referendum in the UK (more important economically if not emotionally) on the future relationship between the UK and the EU.

In the meantime, Putin and his cronies have played a very dangerous game in Ukraine. This is his third war, following armed conflicts with both Chechnya and Georgia, and the signs are that he is not going to walk away quietly. Even without Putin’s (outright) involvement, we have armed conflicts and new terror threats in many countries at present. Libya, Syria, Iraq, Sudan and Israel/Palestine to name a few.

In Europe, the economic recovery is limited to a handful of countries and the ECB has been forced to not only prolong but also intensify its de facto QE programme. The European powerhouse of yesteryear, Germany, looks surprisingly vulnerable and Italy is not in a good state either. The combination of almost zero inflation and high national debt, as in the case of Italy, is a bad one."

Many other are echoing the same sentiments. Some like Stephen King even going to the extent of calling the situation akin to 1984 where war was a constant thing.

Analysts at Brookings find that "The economic recovery in many advanced economies is stalling and growth in emerging markets seems to be losing its momentum, according to the latest TIGER (Tracking Indexes for the Global Economic Recovery) update. The U.S. is now the sole major economy still showing signs of strength."

The latest release of TIGER (Brookings-FT Tracking Indices for the Global Economic Recovery) paints a grim picture. The world economy is in a parlous state, with just a couple of bright spots discernible through the gloom.

The global economic recovery has stalled and become unbalanced, with the U.S. now the sole major economy still showing signs of strength. Growth in China and many other major emerging markets seems to be losing momentum. The world economy is now being powered along essentially by one engine, with the U.S. business cycle at least temporarily delinking from the rest of the world. (read more detail here)

Indian economy has shown signs of stability, though at a much below potential level of growth. Accordingly, this oasis has received significant attention from the yield hungry global investors.

The mute point is could India and US sustain their outperformance in a world that is under serious turmoil? If yes, for how long? I will discuss this in more detail later.

Tuesday, December 29, 2015

Investment Strategy 2016 - 7: Market outlook

Thought for the day

"There is no need to do any housework at all. After the first four years the dirt doesn't get any worse."

—Quentin Crisp (English, 1908-1999)

Word for the day

Abdominous (adj)

Having a large belly; potbellied.

(Source: Dictionary.com)

Malice towards none

Akhand Bharat, as apolitical entity was created by whom and when? And it stayed so Akhand for how long?

First random thought this morning

After South India, now cities in north England and South America face unusual floods. Mother Nature is certainly happy with the way this world is growing. We shall continue to face Mother's angst, if we do not mend our ways ASAP. If past five years are a trend 2016 should see even worst of Mother Nature.

I guess, Paris climate agreement needs to become a substantive accord to please Mother Nature and not just remain a piece of diplomatic hypocrisy.

Investment Strategy 2016 - 7: Market outlook

Unlike past couple of years, this year portending a clear market outlook is much tougher. In December 2013 the greed was a dominating factor as the market was well supported by rising global liquidity and ZIRP and pregnant with hope of a new dawn. In December 2014 the fear was clearly overpowering greed. Global weather was wet and windy as QE began to taper, China's slip became conspicuous and indubitable leading commodity world to crumble; and in domestic arena also skepticism began to grow as the things did not appear working out as expected.

Today as we stand at the exit point of 2015, most fears have come true. The markets, especially commodities, seem to have mostly adjusted to the worst case scenario. Given this, normally the greed should be the dominating factor. Looking at internals of the domestic market movement in past quarter or so, it indeed appears to be so.

However, the global narrative continues to be worrisome. The entire commodities' space looks rather hopeless. There is general consensus that USD strength consequent to end of Fed's ZIRP regime and likely CNY devaluation will add to deflationary pressure. The Eurozone yields and ECB and BoJ stance also appears to be subscribing to this likelihood.

Seesawing between hope of recovery gathering some steam and fear of a global meltdown, outlook for 2016 remains sketchy. In my view, we will have intermittent phases of grey and sunshine during the year and trading short term cycles will be the dominant theme.

The forces of Fear are likely to get fresh ammunition during 2016 with the disinflationary impact of stronger USD and higher Fed rates taking roots, EU and Japan continue to flirt with recession, commodity universe continuing to sink and the impact of fall in commodity prices begins to reflect on global financial system.

Like before, many battles of this ongoing global war will be fought in India too. Indian politicians continue to side with the Fearful, providing them with enough ammunition and food to survive.

The forces of hope may get traction from the policy reset in India becoming tangible. The investors’ sentiment at present is positive about the cyclical recovery. Investor positioning and market internals are clearly pointing towards that. The market implied volatility, volumes and breadth continues to remain low. The volume concentration in top 25 traded stocks is close to all time high.

I am not too excited about a conventional cyclical recovery in 2016. Cost efficiencies, productivity gains and ground breaking for some of the prominent FDI projects in manufacturing area would create excitement in market. Staple consumption could be supported by higher urban wages and normal rural income (assuming a normal monsoon). Export demand may continue to remain sluggish.

Also Read

Adapt to lower return on investments

10 things to watch

2016: Technical trend

Global growth and flows

Investment, savings & consumption

Corporate earnings & valuations

Wednesday, December 24, 2014

2015: Market outlook...the battle continues

Thought for the day

"To succeed in life, you need two things: ignorance and confidence."

- Mark Twain (American, 1835-1910)

Word for the day

Rubricate (adj)

To mark or color with red.

(Source: Dictionary.com)

Teaser for the day

By VHP definition all Pakistani and Bangladeshi Muslims are converted Hindus.

Then why Bangladeshi Muslims are illegal in India?

2015: Market outlook...the battle continues

On December 16, 2013 when I sat to write my outlook for the year 2014, the conditions were mostly reverse of what we have on our hand today.

In the eternal war between the forces of Fear and Greed, the forces of fear then had exhausted most of their ammunition, e.g., EU disintegration, Grexit, PIGS default, hyper-inflation resulting from the Mints printing money incessantly, Iran reneging, Currency war erupting and endangering emerging economies, hard landing of Chinese economy, etc. Whereas the forces of Greed had just got fresh batch of ammunition – stable job market in US, housing boom in UK and US, stable financial markets in EU, stronger USD, Chinese growth crawling up, moderate or no inflation, US financials back in business, lower commodity prices, US energy revolution, and mostly stable & peaceful conditions in hot beds like Pakistan, Afghanistan, Iraq, Iran, Libya, Yemen, Sri Lanka (except smaller pockets like Syria).

Filled by hope, the outlook for 2014 therefore was mostly optimistic.

Sadly it is not the today. In a reversal, the forces of Greed appear exhausted this time. The global scene has turned windy, wet and depressing and narrative has turned scary.

Moreover, the domestic scenario which was filled with hope a strong government that will be able to deliver very fast on economic agenda, is also circumspect. The PM, Narendra Modi, appears struggling to bring all his supporters on the same page insofar as the priorities of the government is concerned. At least in public discourse Feudalistic idea of Nationalism seems to be dominating the socio-economic concerns.

Lack of ideas to implement the PM's vision of economic reforms & development, poor innovation skills, and extreme risk aversion amongst Team Modi is not lending any credible support to the forces of Greed either.

The forces of Fear are likely to get fresh ammunition during 2015 when further – the disinflationary impact of stronger USD gains strengthens its roots, US Fed begins to raise policy rates, EU and Japan slither deeper into recession, commodity universe continue to sink and the impact of fall in commodity prices begins to reflect on global financial system.

Like before, many battles of this ongoing global war will be fought in India too. Indian politicians continue to side with the Fearful, providing them with enough ammunition and food to survive.

Inarguably, the investors’ sentiment at present is positive about the cyclical recovery. But never in history the cyclical recoveries have began with benchmark indices ruling close to their all time high levels and bond yields also at such high levels. The current cycle could therefore be short, shallow and volatile. Investor positioning and market internals are clearly pointing towards that. The market implied volatility, volumes and breadth continues to remain low. The volume concentration in top 15 traded stocks is close to all time high.

My outlook for the Indian equity markets for 2015 is as follows:

(a) The marketplace will witness an intense battle between the forces of Fear and Greed and in my view, forces of the Fear will have an upper hand.

(b) 1H2015 may be more volatile whereas 2H2015 will mostly be calm and cold.

(c) The market will have more opportunities for traders than investors. The quality stocks may continue to trade at exorbitant premium and therefore may not offer much in terms of investment opportunity. The cyclical will continue to be confronted by the prospects of weak recovery in at least1H2015 and hence continue to move in a trading range with much higher volatility.

(d) There is little chance of any material re-rating of Indian equities, so the return expectations will remain muted in the range of 10-13%.

(e) The bond yields may not correct much from the current level, as the fiscal pressure may remain intact and global cost of capital rises.

(f) Save for a drastic global event like Lehman collapse (not improbable), Nifty may move in a larger range of 7420 - 9400. Strong trading buying and leveraging opportunities will therefore emerge in to 7850-8000 Nifty range.

My strategy for 2015 will therefore be as follows:

Strategy: More trading needed to meet return target

· Retain equity allocation to overweight.

· Increase allocation to trading from present 10% of equity allocation to 25%.

· Target 15% absolute return in the risk portfolio over next five years.

· Normalize overweight on global pharma and IT.

· Continue NIL weight to underweight on global commodities.

· Increase exposure to domestic Cyclicals, excluding minerals and metals, in 2H2015.

· Maintain overweight on domestic consumers including consumer staples and healthcare.

· Stay invested in longer duration debt.

· Plan for lower tax benefits on financial investments.

· Avoid PSU in general. Selective policy neutral companies could however be considered on case to case basis.