Vijay Kumar Gaba: January 2014

Friday, January 31, 2014

Cognitive dissonance

Thought for the day

“Give thy thoughts no tongue.”

- William Shakespeare (English, 1564-1616)

Word for the day

Ugsome (adj)

Horrid; loathsome.

(Source: Dictionary.com)

Teaser for the day

From “Solid BRIC” to “Fragile Five” – India has traveled long distance (to south) in last one decade.

Cognitive dissonance

In past one week, I dialed 30 numbers selected randomly from my professional phone book. Given the conflicting signals coming out of markets, I just wanted to assess the mood of the market. The people I called were a boring mix of investment managers, credit managers, corporate bankers, equity analysts, economist, wealth managers, insurance brokers, some seasoned investors and couple of corporate treasury managers. Each conversation lasted 10-25minutes.

I asked one simple question to all the people I had called – “what are you most excited about and what is bothering you most at this point in time?”

The responses were varied, mostly unclear, and reflected the cognitive dissonance in the state of mind. May be my sample was faulty, but not one soul appeared confident about the direction of markets and economy even for next six months.

The key highlights of my impromptu conversation with market experts could be listed follows:

(a) Considering that the markets have been turbulent for most of this week, all the people I called appeared surprisingly free and interested in talking to me,. However, none was inclined to discuss financial markets and investments. All sounded indifferent towards investments.

This in my experience usually occurs close to bottom of a deep bear market. Sensex at all time high does not corroborate this.

(b) There is an old saying in context of financial markets – “in good times few market participants have time for gaining knowledge; and in bad times few are inclined”. From my discussion it appeared that not many people are bothering to go below headlines and beyond front pages. Yet another sign of bad times.

(c) An overwhelming 70% were most concerned about political developments in the country and 80% were most excited about the prospects of Narendra Modi becoming next prime minister.

This partially explains the higher Sensex levels. Probably 17% single day rally of 18^th May 2009 is still haunting people. At the same time this also highlights the risk should for some reason Modi not reach 7RCR.

(d) When specifically asked, opinion was vertically divided on the threat of China hard landing. However, everyone agreed that should this happen, Indian markets will sink into a deep bear phase.

(e) 14/30 were optimistic about the economic growth recovering to 6% in 2HFY15. But conversely, 12 of these 14 believe that interest rates may not come down in next 12months!.

(f) “Exporters” was a consensus favorite theme. But only 3 of 30 were concerned about the impact of slowdown in Latin America, China, Russia, Australia, East and South East Asia on Indian exports.

(g) 17 of 30 believe that the USA will lead the next global economic upturn. But 12 of these 17 believe that INR will appreciate to 55-57 range by March 2015.

Thursday, January 30, 2014

For a few Yen more

Thought for the day

“Life is pretty simple: You do some stuff. Most fails. Some works. You do more of what works. If it works big, others quickly copy it. Then you do something else. The trick is the doing something else.”

- Leonardo DI Vinci (Italian, 1452-1519)

Word for the day

Riposte (n)

A quick and effective reply by word or act.

(Source: Dictionary.com)

Teaser for the day

A UNESCO report reveals that in India 90% of poor children remain illiterate even after 4yrs of education.

AK and AY propose to reward the teachers responsible for achieving this amazing feat by making their jobs permanent!

For a few Yen more

India’s largest car manufacturer, Maruti Suzuki Limited (MSL) announced some significant changes to its India strategy on Tuesday. The company stated that the plans to set up a new manufacturing plant in the state of Gujarat are being shelved in favor of its parent company Suzuki Motors. The Gujarat manufacturing facility will now be set under a 100% subsidiary of Suzuki Motors.

It has been projected to the investors that this plant will manufacture vehicles exclusively for MSL. Accordingly, the entire capex, besides land cost, will be done by the parent company. MSL will only lease the land to the new 100% subsidiary.

The traders in a knee jerk reaction heavily shorted MSL stock. However, post clarification by the MSL management there was a scramble to cover the shorts. Traders perhaps realized that it was 3year too early to short the stock.

To me however the management’s explanation and logic behind such move does not appear convincing enough. In my view there could be much more behind this deal than what is being told to investors.

I find it important to highlight because this instance reinforces the trend seen in case of ACC-Ambuja deal last year (see here).

The following probabilities make the MSL unsuitable for my model portfolio:

(a) The change in strategy could be an effect of labor unrest seen in recent years at MSL Gurgaon manufacturing facilities. Through this deal, the company will be able to offer better deal to the employees at new plant, while the struggle with older employees continues.

(b) It is not clear whether all further expansions will happen under the new arrangement? If so, what will happen if MSL decides to shut down Haryana facilities in long term due to continued labor unrest and logistic issues? Moreover, it is not clear whether the new 100% subsidiary will honor the commitments made to various component ancillaries, vendors and suppliers. If not, how will it affect their relationship with MSL?

(c) The process of indigenization of technology could abruptly halt, as most new models could be manufactured at new plant post 2017. R&D activities of MSL may also be hampered.

(d) There will be almost no transparency about payments for royalty and technology transfer, as account of the new 100% subsidiary will not be open to public scrutiny.

(e) The Gujarat plant, being closer to port, will certainly be a better source for exports. I would like to see what the arrangement between MSL and the parent says about this. From the details available so far, it appears that the new 100% subsidiary will not engage in marketing and distribution activities which will be exclusively carried on by MSL only. However, assumption that this arrangement will apply or continue to apply to export activities in long term also does not seem logical.

(f) In any case, going forward the company shall face increased competition in its core small and midsized car constituency, as most competitors are now focusing on that.

Wednesday, January 29, 2014

Rajan paints the twon red

Thought for the day

“Honesty is the cruelest game of all, because not only can you hurt someone - and hurt them to the bone - you can feel self-righteous about it at the same time.”

- Dave Van Rank (American, 1936-2002)

Word for the day

Squib (n)

A short and witty or sarcastic saying or writing

(Source: Dictionary.com)

Teaser for the day

Joke of the century

“The government of the day had no role in 1984 Delhi genocide.”

Rajan paints the town red

The RBI governor Raghuram Rajan appeared a much worried man as he made a statement on the RBI monetary policy yesterday. Contrary to the market expectations, and much to the chagrin of his political bosses and large borrowers, he not only raised the policy rates but also smashed all claims of economic revival having taken firm roots.

Despite reluctant euphemism and smart camouflaging, the picture he painted was distinctly red. I have been repeatedly (and irritatingly to many) highlighting the following concerns, many of which also found place the RBI’s policy statement.

(a) Global economic recovery at present is mostly an American phenomenon. EU, Japan and China are still struggling and appear fragile.

(b) US might have successfully exported sub-prime crisis & deflation, and embarked on the path to necessary monetary correction. But financial market contagion remains a clear potential risk, as financial systems in many emerging markets (especially those heavily dependent on commodities’ demand), EU, Japan and China remain vulnerable.

(c) Domestic economic conditions in India remain worrisome and more likely to worsen further before any improvement is seen. Most macro parameters e.g., investment, employment, savings, inflation, and consumption have deteriorated despite decent pick up in agriculture growth. Fiscal tightening in 2HFY14 is likely to make the slowdown even more pronounced. RBI expects FY14 growth to remain below 5% and a small pickup in FY15 to 5.5%.

(d) Despite bumper monsoon, consumer price inflation continues to remain in double digit. RBI expects it to moderate only slightly to 8.5% in next 15months. On the other hand core inflation has started to raise it head again. RBI finds that Hardening prices of services and key intermediates seen in conjunction with rising bank credit, increase in order books, pick-up in capacity utilisation and the decline in inventories of raw materials and finished goods in relation to sales suggests that aggregate demand pressures are still imparting an upside to overall inflation.

(e) By saying that RBI may not tighten the policy further, the governor probably hinted that growth probably has reached the breaking point and it may not be able to take any further rate hike. This makes the task of achieving growth-inflation equilibrium even more complicated. Especially when the global interest rates are likely to firm up, pressure on INR is likely to accentuate, and new government is likely to assume office burdened with humongous expectations.

(f) The ad hoc measures taken to control CAD and stabilize INR since September 2013 might have to be reversed at some point in time. As the finance minister himself admitted to large scale gold smuggling in recent months, there is no evidence of any structural improvement in conditions and it continue to remain a cause of worry.

May be I am reading too much into the Governor’s body language. But I cannot help, as it fully corroborates what I am witnessing during my journey across the country and also my interaction with the corporate managers.

Tuesday, January 28, 2014

Nothing new to panic about

Thought for the day

“The power of accurate observation is commonly called cynicism by those who have not got it.”

- George Bernard Shaw (Irish, 1856-1950)

Word for the day

Boîte (n)

A nightclub; cabaret

(Source: Dictionary.com)

Teaser for the day

Who plays the game of anarchy better AAP or MNS?

Nothing new to panic about

The sky over global financial markets has suddenly turned overcast. There is little sign of sunshine that was bedazzling investors’ eyes till middle of last week. The problems which were always there for everyone to see and feel have captured headlines in perfect synchronized fashion. Consequently, here it is – the first risk off trading spell of the year 2014.

Since there is little evidence of any fresh catalyst for the synchronized global “risk off”, the only plausible reason I could think is the impending FOMC meet on 28-29 January and expectations of Fed further moderating the bond buying program.

With the benefit of hindsight, we know that in past there have been many occasions when synchronized market movements have been orchestrated to influence major policy decisions by Fed, ECB etc. If this is the case, the current weakness in the market may continue for another couple of days. However, if the current sell off is result of serious realization that the bullishness seen since second half of 2013 might be a case of undue optimism we might see a much deeper and prolonged correction over next couple of months.

Nonetheless, as I have been highlighting since past many months, it is important to note that while the “whatever it takes” attitude of world’s largest central banks (Fed, ECB, BoJ, BoE and PoBC) has prevented the global financial system from collapsing giving a semblance of stabilization, the objective of sustainable and faster economic growth is far from met. The repression of “savers” across the globe has brought the global economy at the verge of deep deflationary abyss.

I, like most others, hope that this will the “point of return” and all will be well by the end of this decade. However, you may call me cynical for I do not expect a miracle to happen in next couple of quarters.

In the particular context of India, I have consistently maintained that any sustainable equity rally will occur only due to domestic factors – growth stabilizing close to 6%; substantial balance sheet corrections – corporate balance sheet correction by distress sale of assets and financial institutions assuming a large share of stress (like mid 1990’s) and government balance sheet correction through stronger financial repression (higher negative real rates and weaker currency); sale of public assets, fiscal prudence (higher taxes – lower subsidies) etc.

I believe that nothing of this sort happening in next couple of quarters at the least (Modi or no Modi). The Indian economy should continue to struggle with stagflation like conditions for at least 4-6 more quarters. High inflation and rates should keep growth below potential and financial stress relatively elevated. Investment and credit as investment theme may therefore not perform in short to medium term.

The substantial downside in Indian equities may come from the global factors, primarily negative flows due to whatever reasons.

A sharp shallow bubble building rally similar to 1999-2000, will not surprise me. I am though not too inclined to participate in such a rally. Rather whenever such rally occurs, I’ll be busy in the side show preparing for the next boom.

Friday, January 24, 2014

Modi in a Chakravyuh

Thought for the day

“Every positive value has its price in negative terms... the genius of Einstein leads to Hiroshima.”

- Pablo Picasso (Spanish, 1881-1973)

Word for the day

Idem (pronoun)

The same as previously given or mentioned.

(Source: Dictionary.com)

Teaser for the day

Degeneration of a movement:

2012: Our struggle is only to make the life of common man better.

2013: Only AAP can make common man’s life better.

2014: Whatever AAP does is the only thing that is good for common man.

Modi in a Chakravyuh

From business confidence and financial market view point a large majority of participants feel that Narendra Modi’s elevation to PM office would be a good thing. Even rating agencies like Moody & S&P and many global research firms have also echoed similar sentiments. Besides, many have also expressed concerns that the continuation of current regime could be detrimental to the interests of Indian businesses and markets.

In my view, there is little substantive evidence in support of this thesis. Nevertheless, inarguably a change would be good for boosting the sagging morale and hence desirable.

Insofar as Modi becoming PM is concerned – it is an extremely complicated proposition. For one, Modi’s strengths are becoming his major problems, much like the brave prince Abhimanyu in Mahabharata.

Modi sure does know how to govern and lead the nation, but winning 272 seats is something he cannot do on his own. (Abhimanyu knew how to enter the Chkravyuh but did not know how to break the fulcrum and exit)

In my view, Narendra Modi is playing his part well enough. He has created a wave and penetrated deep in the opposition bastions, but he has a weak army which is not keeping pace with him; often leaving him alone in the battle hence imperiling his chances of victory.

Apparently Modi faces the following three major obstacles in his march towards 7RCR:

(a) Limited reach of BJP – geographically and communal. BJP’s presence is mostly confined to 250-275 Lok Sabha seats. In 2009 it contested 433, won 116, was runner up in 110 and lost deposit in 170. In its best show in 1999, with widest possible alliance it won 182/339 and was runner up in another 112. The best show this time with present alliances could take BJP to 200-210 odd seats (Exhibit 2), with pre-poll allies contributing another 15-20.

(b) Modi’s perception of a good and non-corruptible administrator. In past decade a trend has emerged whereby the people have mostly voted for continuity if the image of the leader is good. 13 chief ministers from 8 different parties are currently serving 2^nd to 5^th term. Incumbent PM is also serving second term (though he has made himself unavailable for 3^rd term). (Exhibit 1)

This trend might be worrying many potential allies and even BJP leaders. If Modi become PM and performs as per expectations, evicting him from 7RCR could be difficult in next 10-15years. This may (a) help BJP expanding to its traditionally weak areas like South India or North East; and (b) impede the personal ambitions of many senior leaders (within BJP and outside) of getting a chance to occupy PM’s chair. These leaders may therefore not want a strong leader as PM.

(c) Secularism as fulcrum of opportunistic politics. A Modi victory will likely make the political debate over secularism redundant. This will break the very fulcrum of the politics of convenience used by various opposing parties to join hands to form governments. Many politicians and parties like TMC, JDU, SP, BSP, RJD, TDP, BJD, ADMK, LJP, NC, JMM etc., would not like to lose this significant tool to gain/retain power.

Thursday, January 23, 2014

In this Mahabharata no one shall remain neutral

Thought for the day

“If anything is certain, it is that I myself am not a Marxist.”

- Karl Marx (German, 1818-1883)

Word for the day

Misoneism (n)

Hatred or dislike of what is new or represents change.

(Source: Dictionary.com)

Teaser for the day

I do not know why there is so much excitement over AAP’s sarkari dharna in Delhi.

Communists ran West Bengal for 35yrs in this manner only. Kolkata used to be choked almost every week for 35yrs. The only difference was that Jyoti Babu did not sit on dharna. They had cadre who zealously believes in them.

In this Mahabharata no one shall remain neutral

2014 general elections in India are no ordinary elections. It is decidedly a referendum on the desire and commitment of people for change in the popular political discourse of the country. It is a two layered contest (a) between continuity of feudalistic politics dominated by vested interests & parochial considerations and aspirations of common people and (b) within various political organizations, between status quoits and progressive elements.

In this Mahabharata nobody can afford to remain neutral. All need to take a side – right or wrong only time will tell. I personally have decided to side with the aspirations of the people.

Speaking for the political parties, their public posturing suggests that most of them are rooting for the aspirations of people; though their actions conspicuously indicate their indelible attachment to feudalistic tendencies.

Given that apparently there is no consensus within parties on the need for and direction of the change – it is inevitably going to be contest about personalities rather than parties and ideologies.

Narendra Modi from BJP & associates has already established himself as the most vocal proponent of the change. His overwhelming persona has successfully obfuscated the traditional agenda of BJP. Many popular voices from business, commerce, finance and civil society have accepted his credentials. A number of opinion polls have projected him as most popular choice for leading the country.

Congress has reluctantly presented Rahul Gandhi as its choice for leadership. The allies are not fully convinced. The popular opinion is least convinced.

AAP is a new entrant in the game. In short span of time they have admirably captured substantial mind-space, especially in e-literate India. Its leader Arvind Kejriwal has emerged as second popular choice, after Modi, for leading the change. His rebellious demeanor, Marxist orientation and unpretentious disposition has attracted many youth, social activists, and oppressed people towards AAP. Current poor economic conditions and growing inequalities, usually a fertile ground for spread of left influence, have also helped a great deal.

Unfortunately, most regional parties who would actually decide who forms the government in May 2014 are however maintaining their status quoits stance. Many regional leaders like Mulayam Singh, Nitish Kumar, Mayawati, J. Jayalalitha, Sharad Pawar etc. sensing a 1996 like opportunity to become Prime Minister – an impossibility should India vote for a change rather than continuity; and therein lies the complexity of this election.

This election is becoming not so much about winning but about making others lose. The candidate with highest popular ratings in various opinion polls, viz., Narendra Modi, is obviously the prime target of each and everyone.

A Narendra Modi win in this election, most likely in my view, will change lot of things, this time perhaps forever…to continue tomorrow