"Never let the future
disturb you. You will meet it, if you have to, with the same weapons of reason
which today arm you against the present."
—Marcus Aurelius (Roman,
121-180)
Word
for the day
Sundog (n)
A small or incomplete
rainbow.
Malice
towards none
PM Modi loves to surprise
people. Great!
What if people surprise him?
First random
thought this morning
I don't keep more than Rs500
currency in my wallet, because I fear government may scrap currency notes anytime.
My faith in the examination system and meritocracy is seriously diminished. I
seriously doubt any data published by the government. I am being told not to
trust the story of Ramayana that my grandmother used to raise me as a good
human being. I am sure my tax liabilities are going to be rise materially. To
make the matter worst, Indian cricket team has lost to Pakistan. I must buy
some hope.
Strategy 2H2017
(a) Indian macro
environment seems stable at present, however there is not much visibility for
further improvement in near future;
(b) Consumer inflation may
ease further due to excessive supply. Manufacturing inflation may also stay low
due to lower commodity prices, poor pricing power and stronger INR. However,
rates may not fall much due to a variety of reasons, like rate trajectory in
developed economies, fiscal pressures due to political reasons, falling private
savings rates and capital constraints at banks. The real rates may therefore
continue to be higher.
(c) There is little
visibility for improvement in private investment demand. The government
investment demand visibility is limited to a few sectors (mainly roads and
irrigation).
(d) The consumption demand
may remain stable. However, there is little visibility of any marked
improvement in consumption demand.
(e) The corporate earnings
may not grow at the rate of 20% CAGR over FY18-FY19. The growth is more likely
to be 12-16%, depending upon (i) how fast situation normalizes post GST
implementation; and (ii) how effectively NPA resolution efforts yield results.
However, given cost efficiencies, better capital allocation, financial
restructuring etc., the quality of corporate earnings has improved. There is
therefore justification for some premium valuation over long term average of
~15x PE ratio.
(f) There is virtually no
case for further re-rating of Indian equities. Post 1QFY18 results, we may in
fact could see slight de-rating to 16-17x from the current 18-19x.
(g) The upside in equities
in next 12-15months seems limited, insofar as the benchmark indices are
concerned. The investment opportunities therefore would mostly exist beyond the
benchmark indices.
My strategy for 2H2017 would be as follows:
·
Continue to remain overweight in equities.
Prefer long term debt.
·
Focus on globally competitive businesses,
preferably with significant IPR assets, market leadership and high quality of
earnings.
·
Underweight capital goods manufacturers.
·
Prefer road and water project contractors and
asset owners with stronger balance sheets.
·
Prefer consumption proxies, e.g., packaging,
supply chain, financing etc., versus expensive final good producers; auto OEMs.
·
In financial space prefer consumer NBFCs and
select MFIs.
·
Continue to own large real estate developers,
especially those with sizable land bank and lower dependence of pre-sales.
·
Lowering overall 2017 return expectations to
12%, including 1% dividend yield.
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