Thought for the day
“No poet or orator has ever existed who believed there was
any better than himself.”
-Marcus Tullius Cicero (Roman, 106-43BC)
Word for the day
Suppletory (Adj)
Supplying a deficiency.
(Source: Dictionary.com)
Teaser for the day
Mani Shankar Iyer is the best. Says India’s inflation is doing of US Federal
Reserve; candidly admits that “If there were an election today, we would do
very badly.”
Data
is your sword and mine too
The market reaction to poor November IIP data was not at all
surprising; especially short covering in financials. Poor industrial growth and
lower consumer inflation could be a perfect excuse for RBI not to hike rates on
28th January.
Turning a blind eye to hike in rates by Employees’ Provident
Fund Organization (EPFO) which manages majority of retirement savings of Indian
workers could however be perilous.
The production and sales data for automobiles, cement, steel
etc. indicates that IIP data is not likely to improve in next few months in any
significant measures. Inflation may however come back as the fresh winter
vegetable stock gets consumed. Remember every year storage cost, wages,
interest cost, and transportation charges etc. are rising much faster than the
productivity gains. In my view, vegetable and fruit prices shall continue to
rise 6-10% every year for next many years, unless some far reaching farm sector
and agricultural produce marketing reforms take place.
Yesterday morning, one friend who manages treasury of a midsized
corporate showed me an SMS from fund manager of a large fund house. The message
exhorted my friend to invest in long dated securities highlighting that in past
one decade, benchmark yields have been higher than 9% only for 40days. The
current high yields therefore offer a great opportunity. He sought my opinion,
given that I have been advocating short duration and FMPs for past couple of
years.
In my view, this is an interesting piece of data. But it could
be misleading if seen in isolation or without considering a longer series. For
example, it would be interesting to see how many times in past one decade we
had (a) US liquidity tightening and 10yr yields rising over 100% in a matter of
few months; (b) USDINR above 60 level; (c) short term debt over 30% of total
debt with high roll over risk; (d) total debt to GDP ratio consistently above
125% with public debt accounting for 2/3rd of total; (e) household
debt growth outpacing corporate debt growth; (f) consistently rising investment
- savings gap; (g) corporate debt equity over 70%, RoE below 15%; (h) severe
financial repression by government through high negative rates; (i) Forex cover
for less than 8months of import; and (j) external debt close to 25% of GDP with
threat of rating downgrade if elections do not provide a stable government.
It would also be interesting to find how the yields behave
during 1990’s, the period which resembles more closely to the current
conditions. The benchmark yields were perhaps above 9% for most part of the
decade.
The same fund manager has also pointed out that Sensex has given
no return for last six years (2008-2013) while earnings have grown over 60%
during this period; and therefore it is also a good opportunity to invest in
equities.
Never heard 6years as benchmark before! However, if we consider
five years (2009-2013), Sensex has given over 100% return with about 50% rise
in earnings.
I would continue to advocate short duration, FMPs and high
quality equity to be bought over next several months.
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