Sunday, July 19, 2015

Planning the move from Macro to Micro

Thought for the day
"You have no enemy except for yourself."
-          Francis of Assisi (Italian, 1182-1226)
Word for the day
Assisi (Italian, 1182-1226)
Word for the day
Allegiant (adj)
Loyal; faithful.
(Source: Dictionary.com)
Malice towards none
The prerequisite for rectifying a mistake fully is honest admission of such mistake.
Have various authorities honestly admitted what went wrong in the case of Vyapam?

Planning the move from Macro to Micro

Continuing from yesterday, I believe that the macro trade that has mostly driven the returns in Indian equities in past one year shall gradually yield way to a cyclical micro trade over next 6-12months.
The cyclical micro trade may be driven by the following five primary factors:
(1)   Improved execution led by clearance of stalled and incomplete projects. Prompt clearances and removal of administrative hurdles could unlock a huge amount of capital blocked in these projects.
       Industry feedback suggests that there are some positive developments in this direction that should bear fruits in next 6-12months.
       Increase in supply of coal and gas likely in next6-12 months shall boost power generation and lead to improved capacity utilization in many industries.
(2)   Improved liquidity due to higher government spending on investment and social activities.
       The government spending has been limited by the fiscal constraints, especially in past three years. Higher energy, farm and food subsidies have constricted the public investment as well as consumption. With energy price reforms in place and robust indirect tax collections (primarily due to higher service tax and excise duty on transportation fuel) shall enable government to resume investment in social and physical infrastructure, especially roads, energy and transportation.
(3)   Improved profitability as the benefit of lower global commodity prices kicks in and inventory levels rationalize.
       The export demand may not pick up in hurry given the trends in EU and China. The US could however see decent gains.
       The key would however be the domestic private consumption and investment demand.
(4)   Bottoming of credit cycle. The credit demand has slipped to multi decade lows in recent months, along with worsening credit quality. Given the inflation trajectory and credit demand, the rate cycle is certainly turning down with likely uptick in savings.
       Next 12-15 months may see bottoming of credit cycle with NPAs peaking and credit growth and savings rate bottoming. The corporate leverage may see material correction either through asset sale or conversion to equity.
(5)   With Bihar elections out of way, the government will have a window of 6-9 months (before the next cycle of states elections kicks in) to pursue key legislative measures like GST and other tax reforms. This could encourage investments
The key would be to orient the equity portfolio to this shift from macro trade to cyclical Micro trade. More on this next week.

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