Thought for the day
"Never trust the advice of a man in difficulties."
-
Aesop (Greek, 620-560BC)
Word for the day
Comity (n)
A state of mutual
harmony, friendship, and respect, especially between or among nations or
people; civility.
(Source: Dictionary.com)
Teaser for the day
Taxi, auto, airplane, train, truck, tempo - have you seen any impact of
lower fuel prices in any fare/freight?
For once, let's go with the bulls
There is a popular Hindi saying "Jungle mein mor nacha,
kisne dekha". It is normally
used to convey either of two senses - (a) I do not believe in unverifiable
claims; and (b) No achievement is meaningful if not demonstrated publicly.
The critics of the PM Modi have been using this adage in the
first sense, to discredit his claims of outstanding and holistic development in
Gujarat and achievements of the 8 month old NDA government at the centre.
Whereas the PM and his machinery is using it in the second sense to press their
claims.
I went to the jungle to see the peacock dancing, and found none.
A 55% fall in global crude prices has not caused a penny fall in passenger fare
or goods freight rate in any mode of the transport. In fact the fare/freight
are little higher in many cases. Moreover, no one is talking about any
reduction. For record, I learned that Jamnagar - Mumbai, Lucknow - Delhi,
Kolkata - Delhi and Bhubaneswar - Delhi truck freights are now higher as
compared to August.
It is widely reported and recognized that there is little
improvement in crime rate and corruption. "Ease of doing business"
is so far a peacock dancing in the
jungle. May be an elite group of tourists on a government sponsored Safari have
seen it. Yesterday, I checked with some traders, hawkers, rickshaw pullers,
taxi drivers, financial intermediaries, travel agents, shop keepers in Delhi -
no one has seen any sign of it yet.
Regardless of all this, I decided to go with the bulls for once.
I assume -
(a) Despite strong
global and local headwinds the government will achieve its goal of attaining 8%
real GDP growth by FY19 when it faces the next election.
(b) Despite serious
deflationary pressures globally and consequent financial crisis, Indian corporates
will manage a 18% CAGR earnings growth during FY16-FY19.
(c) Despite higher
USD and Fed rates, and consequent unwinding of USD carry trade, Foreign flows
will remain consistently positive for Indian equities and historical market PE
multiple will re-rate by 10% from current 18x to 20x.
With all these assumptions, which certainly look highly
optimistic and less likely to materialize, I assess that:
(a) The long term
trend economic growth (5% CAGR) in FY19 will still be under 7%, much less than
9% required to generate adequate employment to sustain current savings and
consumption rate.
(b) Nifty at ~15K
would have returned 12% CAGR during the four year period 2015--2018 almost 70%
lower than 2007 5yr CAGR of 41%; though with materially higher risk.
(c) Equities will
still be the best asset class, meaning fixed income, real estate and gold which
constitute over 85% of household assets, will return less than 10% CAGR, so no
visible wealth effect.
In short, by running ahead of Modi government, the market might
have already realized much of the gains that would have come through economic
recovery during FY16-FY19. Even most optimistic bullish assumption do not show
the kind of return seen in 2006-2007.
I am therefore
working with expectation of lower return, higher volatility and much higher
risk over next four years.
Will talk about
near term strategy tomorrow.
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