Tuesday, May 10, 2016

I see it half full!

"Men are strong so long as they represent a strong idea they become powerless when they oppose it."
— Sigmund Freud (Austrian, 1956-1939)
Word for the day
Turpitude (n)
Vile, shameful, or base character; depravity.
Malice towards none
How valid is the argument of "potential job losses" against banning socially harmful and economically unproductive industries like fire crackers, tobacco products, etc?
First random thought this morning
Investors in ecommerce ventures like Flipkart, Jabong, Zomato, Housing.com, etc. have noted serious erosion in their valuations.
Should RBI be worried about bank's exposure to these companies' working capital funding? Also do the loans to fund fancy houses and cars of the executives of these startups need any red flag?
Does government need to review their "Startup India" model?
Or let it be! We'll cross the bridge when we reach there.

I see it half full!

Last week I mentioned about three key risks to Indian equities in the near to short term (see here).
The risk of water shortage hampering growth has resonated with the readers most, for obvious reasons. Many of them are facing it in their routine daily life.
However, the other two have evoked a rather ambivalent response.
Some traders have exposure to commodity reflation trade (mostly through steel, cement and sugar) whereas many others are regretting the "miss" and looking to buy on dips. The overwhelming feeling is that state protection is inevitably permanent and will likely increase from the current levels.
E-commerce has little direct exposure of domestic investors. Only a handful of ultra high networth individuals and some corporates have invested through various AIFs. The exposure of course is not meaningful, relative to their networth, and therefore not concerting as yet. On the contrary, private equity funds (mostly funded by foreign capital) are a seriously worried lot. The value of their funds has seen massive erosion. They have been forced to cut on costs. The commitment to future projects is filled with skepticism.
My views on this are as follows:
I believe in the forecast of an overall normal monsoon. I feel last week's reversal in Southern Oscillation Index (SOI) should further ease concerns about a serious delays in arrival of rains. Having said this, I believe that—
(a)   This normal monsoon will mostly bring macro corrections in FY17 - normalization of food inflation expectations, relatively higher farm sector growth, lower financial stress in rural sector and hope of investment revival. 9MFY17 may not see much growth in rural consumption or farm sector investment. The conditions may improve only after a normal Rabi harvest in spring of 2017.
       Nonetheless, if 1QFY17 and 2QFY17 results lead to unwinding of the "hope" trade, it will be a good opportunity for investors to aggressively bet on consumption theme - white goods, two wheelers, and construction material included.
       A serious correction in banks and NBFCs will be an opportunity to build a financial overweight portfolio.
(b)   I am too naive to intelligently analyze near term commodity trade. Nonetheless, I don't see global growth picking up momentum anytime soon.
       I am confident that Chinese economy will witness a protracted correction period and may not rebound hurriedly. It's not only excess capacities, unsustainable debt or non-democratic corrupt administration. I am more worried about demography, global positioning and rise of nationalism in the west.
       I therefore see a much deeper and longer bear market in global commodities, gold included.........to continue tomorrow


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