Do it yourself

4QFY13 results of L&T and guidance for FY14 substantiate our view that domestic investment cycle in India is seriously broken and may take more than marginal rate cuts to get back on track; natural corollary to this is that the path to 8% growth trajectory is not only long but also tedious. Years of fiscal profligacy and misdirected monetary policy are to blame to a large extent, though poor governance and non-compliance by corporates and other tax payers cannot escape the blame. In a recent article Nobel Laureate Michael Spence highlighted that “Accumulating excessive debt usually entails moving some part of domestic aggregate demand forward in time, so the exit from that debt must include more savings and diminished demand. The negative shock adversely impacts the non-tradable sector, which is large (roughly two-thirds of an advanced economy) and wholly dependent on domestic demand. As a result, growth and employment rates fall during the deleveraging period. In...

Many equity markets world over (with the notable exception of China) have mostly recouped their losses of past five years. The same however cannot be said about the macroeconomic data. In fact there are little signs, despite near zero interest rates and persistently low inflation in developed economies, of economic growth stabilizing even at lowest levels or employment conditions improving in any helpful measure. This is leading many, including InvesTrekk, to believe that the extant equity rally may be purely technical and hence should not be considered as beginning of a secular bull market. In exclusive Indian context, the rally has certainly outpaced macroeconomic and corporate fundamentals and valuations in select pockets are already flirting with bubble like conditions. A normal monsoon, complete government post next general elections (hopefully!), lower rate, benign consumer prices and massive election spend may support higher consumption demand and hence justify expe...

We have been accused of being excessively and obdurately pessimistic on market in past one month. We strongly deny the charge. We are of the view that the present bullishness on Wall/Dalal street is like a cart without horse slithering down the hill. The following two charts (via Zero Hedge ) aptly demonstrates that bulls are mostly confined to “the street’ and have not yet reached the real economy. We shall wait for the cart to get behind a healthy horse before riding it.

InvesTrekk core portfolio for FY14 has returned 11% since its launch on 1 April 2013. This compares to 9% return on Nifty. As two components Lupin and Yes Bank have returned over 25% in 6 weeks, we book profit there and invest the proceeds in TCS (8% weight) and keep 2% cash. To see the updated portfolio please click here. ==================================== It is important to note that InvesTrekk is a purely research oriented firm and does not offer any portfolio management , brokerage, money management or investment advisory services of any kind. The model portfolios are only for illustrative purposes. Please take advise of a qualified and registered investment advisor before taking any investment decision. InvesTrekk Research Reports provide generalized macro investment strategy to its subscribers.. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or ...

Continuing with our second phase of discovering India, we travelled to Rajasthan in past one week. We drove through 15 districts of the state, namely, Udaipur, Sirohi, Jalore, Barmer, Pali, Bhilwara, Tonk, Jaipur, Sikar, Alwar, Bundi, Kota, Jhalawar and Rajsamund. The most critical learning of this trip was that in a land that supposedly takes pride in its traditions and history, these things find little relevance in peoples’ life. People are concerned with their roots (history, culture, tradition) only to the extent it could be sold to “tourists”. Our efforts to find people who would wish to keep the traditions alive because they take pride in this, were totally futile. If we speak in words of famous American author Mason Cooley “Preserving tradition has become a nice hobby, like stamp collecting.” It is no longer a way of life. The key take away of our Rajasthan trip were as follows: (a)    After speaking with over 800 people across 15 districts, we feel tha...

The markets movement in India in past couple of weeks confirms that our hopes and fears are both coming true. We had hoped that Indian markets will benefit from the global risk-on mood and participate in the rally that is conspicuously reminiscent of 1999-2001 global rally. The benchmark equity indices appear set to rise another 5% in this melee. We had feared that the corporate fundamentals may not improve in any substantial measure and hence would only lend a feeble support to the rising valuations; much like 1999-2001. It is important to note that whenever the long term market returns have significantly outperformed the earnings growth we have seen sharp corrections in the market. (Source: BSE, InvesTrekk Global Research) In our view, if the fall in commodity prices and cost of capital does not result in improved profitability over next 2-3 quarters and Nifty continues to trade above 6000 level, we shall see a substantial correction of 20-25% in equ...

It is important to note that “money” is different from “currency”. Consider it like this: For a theater that can seat 1200 people, if the owner prints 5000 tickets for one show – the “excess” 3800 tickets will have no value. Similarly, if the central bankers print “currency” that is more than the amount required for transacting the real goods and services produced in the economy, the “excess” currency will have no value and hence it is not “money”. The unprecedented bond purchase program of global central bankers, under various schemes and programs, collectively referred to as quantitative easing or QE, has been subject of intense debate in past four years. QE in instant case has two primary objective - (a) lend stability to global financial system which witnessed a complete collapse post Lehman Bros. bankruptcy in 2008; and (b) bring the global economy back to a sustainable higher growth path. The stability witnessed in the global financial market in the wake of...

Conventionally one would have expected higher volatility, jitteriness and weakness in the market given the political impropriety leading to legislative impasse and administrative inaction. However, the market has brushed aside most concerns and moved on. We are however not surprised by the market’s reaction to the political events. We firmly believe that market is not indifferent to the political event and the collective wisdom has assimilated the political environment well. We believe that market is finding the political events constructive and medium to long term positive. Insofar as the up move is concerned, it has two major drivers – (a) global positive sentiment towards risk assets, especially equity, and consequent larger FII participation and (b) bottoming of macroeconomic fundamentals, in particular inflation, rates and investment demand. Domestic politics has little influence on global markets and flows. Macro fundamentals do get impacted by the efficacy or othe...

The cold response of household investors to the ~8% rally in Indian equities in past six weeks has apparently intrigued many pundits. The rally is characterized by persistently low volumes, poor market breadth, low volatility, implying total lack of greed or fear. On the positive side, it implies that this rally may continue much further than most of us anticipate as so called weaker hands are not participating. On the negative side, it lacks any foundation and is always susceptible to a sudden crash like January 2008. In traditional sense, we may neither call it “Pain Rally” – since no one was interested in investing even at lower level; nor it is a relief rally – since the mid and small cap stocks or laggard mutual funds with which household investors are still saddled have not participated much in the rally. Our discussion with some investors suggests that it is not even a regret rally – for those who sold stocks or redeemed their MF investments a few weeks earlier. ...

The feel good factor in global equity markets is going strong since past few months. India has also joined the party in past few weeks. Obviously no one would like to see a party pooper at this point in time. Nonetheless, there are some and investors would ignore them only at their risk. The perennial party pooper Nouriel Roubini said on Tuesday that Stocks aren't in bubble territory as yet, but a "huge rally in risk assets" over the next two years puts markets in danger of a big crash. But more notable is Michael Snyder of The Economic Collapse Blog , who is flashing the following dozen warning signals: 1.        The price of copper has traditionally been one of the very best indicators of the future performance of the U.S. economy. It is down nearly 20 percent so far this year. 2.        Home renovation spending has fallen back to depressingly-low 2010 levels. 3.        U...

Thi khabar garm ke Ghalib ke urenge purze, Dekhne hum bhi gaye the per tamasha na hua. – Mirza Ghalib (The buzz was that I will be publically thrashed today; I also went to see the drama; but nothing happened.) Wednesday 08 th May 2013 was widely touted by media as super Wednesday. Karnataka assembly poll results and Supreme Court’s hearing on CBI’s affidavit in Coal Block allotment case were widely seen as critical for the political establishment of the country. However, as it turned out, nothing happened. Karnataka poll results were exactly on the lines we expected . BJP lost. Congress did not make it big. B. S. Yeddyurappa made ignominious exit. Supreme Court censured CBI but spared the political bosses. Stock markets ignored both the events and moved on. Companies with good results (e.g., HDFC, Lupin) gained; and those giving bad numbers (e.g., Ranbaxy) were punished. A normal day, prima facie. At least five disturbing trends continued unabated, namely- ...

We started the second phase of our “India Journey” from Gujarat. Our team travelled to 11 districts across South, Central and Saurashtra regions of Gujarat. In our numerous interactions with people in past year or so, we found that mere mention of word “Gujarat” is enough to instigate a debate. Not surprisingly, most urbanites across the country have strong views on Gujarat. Though the opinion is divided on the candidature of Narendra Modi for PMship, majority of people outside Gujarat have a positive perception about the Gujarat growth model. We therefore kept our focus on the socio-economic conditions of Gujarat and what that could mean for India in coming years. Politics inevitably intruded in discussions. The key findings of our Gujarat trip were as follows: (a)    The most striking observation was the huge socio-economic disparities especially in semi-urban and rural areas. People suggested that a large part of prosperity in past two decades has come...

As per the latest policy statement issued by RBI “By far the biggest risk to the economy stems from the CAD”. The central bank believes that “A large CAD, appreciably above the sustainable level year after year, will put pressure on servicing of external liabilities.” RBI finds that the large CAD is a risk by itself and “its financing exposes the economy to the risk of sudden stop and reversal of capital flows”. Although the CAD could be financed last year because of easy liquidity conditions in the global system, RBI believes that the global liquidity situation could quickly alter for emerging and developing economies (EDEs), including India, for two reasons. First, the outlook for advanced economies (AE) remains uncertain, and even if there may be no event shocks, there could well be process shocks which could result in capital outflows from EDEs. Second, with quantitative easing (QE), AE central banks are in uncharted territory with considerable uncertainty about the traje...

Last week we highlighted some global trends ( see here ) that could have substantial impact the Indian economy and markets in short to midterm. One of the top global trends of present times is the “easy money”. It is widely believed that the liquidity conditions are likely to remain comfortable at least till end of 2014. Besides, the central bankers have effectively ensured that a systemic collapse like the one happened post Lehman in 2008 does not recur. Episodes of uncertainty and instability in Greece (2010-11), Italy, Spain (2012) and Cyprus recently have demonstrated that financial markets are much more stable and sanguine now, as compared to 2008-09. Unilever Plc. has taken advantage of easy and cheap money to increase stake in its high yielding Indian subsidiary. US large corporations that had been sitting on hoards of cash are now aggressively looking for opportunities. U.S. deal activity surged 62 percent during the first quarter of 2013, bolstered by a series of dea...