Vijay Kumar Gaba: July 2017

Friday, July 28, 2017

Factroing Japan in investment strategy

Thought for the day

"Most of us spend too much time on the last twenty-four hours and too little on the last six thousand years."

—Will Durant (American, 1885-1981)

Word for the day

Autarky (n)

The condition of self-sufficiency, especially economic, as applied to a nation.

A national policy of economic independence.

Malice towards none

Other things aside, one thing is very clear - most experienced Indian politicians are thick skinned and shameless!

First random thought this morning

In popular perception, both PM Narendra Modi and CM Nitish Kumar have an image of honest and development oriented administrator.

It is for the first time they have joined hands.

It would be interesting to see if this holy union metamorphoses Bihar out of BIMARU status and in the league of MP and Jharkhand at least.

Would also be interesting to see, whether it is the end of the road for Lalu Yadav, or he will rise again like a phoenix.

Factroing Japan in investment strategy

10years ago in September 2007, a Japanese think tank, The Policy Council of the Japan Forum of International Relations (JFIR), made its 29th Policy Recommendations. The recommendations were aptly titled 'India's Leap Forward and Japan".

The policy recommendations were drawn up on the basis of the considerations like the traditional Indo-Japan economic and cultural relations, paradigm shift in India's economic policy since 1991, India's dire need for infrastructure investment and risk capital, and status of India as the largest recipient of Japan's official development assistance (ODA).

The objective of policy recommendations was to influence the policies which Japan should develop vis-á-vis India, considering India's political and economic realities at that time, in order to make most of India's potential as a driving force for prosperity in Asia.

The group made the following 10 recommendations:

In past one decade, these recommendations have broadly guided the engagement of respective governments and businesses in India and Japan. The contours of these relations are build on strong foundations of mutual trust and benefits, and are regardless of the government or persons at the helm at a given point in time. Nonetheless, the bonhomie between the two incumbent prime ministers has certainly helped in smoothly advancing the agenda and further strengthening the ties.

In fact, the new phase in Indo-Japan ties started in 2011 with signing of a bilateral free trade agreement (FTA).

In recent months, Japanese portfolio investment in India have also accelerated and may have played a material role in rise in prices of Indian equities and bonds. Given the potential size of the Japanese investments that could possibly flow into Indian markets, it is therefore important to factor in the rudiments of the relationships between two countries in the investment strategy.....to continue next week

Thursday, July 27, 2017

In search of Ideas - 3

Thought for the day

"History is mostly guessing; the rest is prejudice."

—Will Durant (American, 1885-1981)

Word for the day

Highfalutin (adj)

Pompous; bombastic; haughty; pretentious.

Malice towards none

Bankelal from Bharatpur, Rajasthan:

"Maharana Pratap defeated Akbar."

Rajesh from Agra, UP (45miles from Bharatpur):

"My history book says Maharana Pratap fought valiantly but lost to Akbar."

Bankelal: "I hate you, you are a traitor. Go to Pakistan."

Rajesh: "You bloody, Sanghi, go to hell".

First random thought this morning

I do not have any data to support this thought, but my hunch is that in past 10years or so, the weather pattern in Thar dessert has changed materially. The area has received much higher than average rains, frequent floods, and cooler winters.

I do not know if authorities have taken note of it and planned to take advantage of this change in weather pattern, for example, by way of creating water bodies to store rain water, planting shrubs etc. that will help recharging ground water. Also is someone studying the impact of oil field that started production in that area almost a decade back!

In search of Ideas - 3

Continuing from yesterday (see here).

As I mentioned yesterday, my buzzword for Indian businesses is "Re".

While I set out on journey to discover ideas that fit in my theme, I would like to leave the readers with the following thoughts:

Re-skilling: In view of the technological changes in global markets, many of the traditional Indian businesses, especially technology services businesses, are finding a material part of their workforce being rendered unsuitable to the new skill set requirements.

Similarly, the regulatory changes like GST, RERA, would also leave many workers unsuitable for work. The accountants and clerks in their 40s and 50s who have managed to work without computers, may need to be re-skilled to work in the changed environment. The estate agents who provided services for sale, purchase and renting of properties may need to pass qualify examination for registering with the regulatory authority.

In my view, the positive investment idea here would be to invest directly in small businesses and start ups which would undertake the onerous task of re-skilling the Indian workforce. Whereas the negative idea would be immediately exit the ITeS vendors who may find it tough to bear the cost of re-skilling their workforce.

Re-locating: The changes like Brexit, stricter H1B and L1 Visa regime and GST may make it necessary/advantageous for companies to relocate their businesses. Especially in Indian context, many industrial units and trading companies that were set to only take advantage of tax arbitrage, may relocate in next 5-7years to more advantageous locations, e.g., near ports or central India. The real estate in these areas and logistic companies that will enable this re-location exercise may worth investing in my view.

Re-structuring & re-organizing: Restructuring of balance sheets and businesses, is already a popular investment theme. Business with stressed but manageable balance sheet; businesses with loads of "non-core assets" which were acquired in the credit frenzy of the previous cycle; and financial services companies which have been struggling with poor asset quality would make a good investment theme.

I shall be looking for (i) stronger balance sheets which will be out in the market with shopping bags to lap up the distressed assets; (ii) stressed companies with good quality assets which could be off loaded to repair the balance sheet, provided the P&L is already looking decent; (iii) financials where P&L is looking good, stressed asset are manageable, capital adequacy is decent and valuation is reasonable.

Re-orienting: The businesses that re-orient fast to be in synch with the new regulatory framework (GST, RERA in particular) and the companies that will be forced to raise compliance level to fall in synch may get favorable response from investors and get rerated. Some sin industries, contractors and real estate businesses will form this universe.

Wednesday, July 26, 2017

In serach of Ideas - 2

Thought for the day

"Civilization exists by geological consent, subject to change without notice."

—Will Durant (American, 1885-1981)

Word for the day

Tarn (n)

A small mountain lake or pool, especially one in a cirque.

Malice towards none

Media (print, electronic, digital and social) does not appear to be presenting true state of Indian affairs. The reporting and commenting seems to suffering from deep prejudice, partisanship and ignorance. Oversimplification and blatant generalization have become norm.

How do I get the true picture?

First random thought this morning

Police and society could not protect me from being raped.

But courts order me to give birth to the child that resulted from that rape, so that I never forget what kind of society I live in and how insecure and unprotected I am, and shall remain.

And you know the worst part, if my child want to mention his father's name in his passport or Aadhar Card, he might have to seek permission of my rapist.

Could it possibly get more ridicules?

In serach of Ideas - 2

Continuing from yesterday (see here).

In the global context, the technology companies that deal in Artificial intelligence (AI), automation, robotics, digitalization, et. al. have been in focus in past one decade. Most of the popular stocks, and perhaps also the top performing since 2009, could be identified with these buzzwords.

The Indian context is however different.

As yet, we are not facing the demographic problems, like the developing economies. To the contrary, to some extent we suffer from the problem of the plenty.

Enhancing productivity through automation etc. therefore faces a social dilemma. The fear of job losses or apprehension of low job creation invariably leads to socio-political resistance.

Moreover, so far, at household level we are certainly not spending more than our earnings. At the government level also, the fiscal discipline is remarkable, given the imperative socio-political compulsions and stark socio-economic inequalities. Cost efficiency though is an integral part of the Indian business as well as household management ethos.

Though, Indian economy has seen encouraging trend in automation & digitization in a large number of sectors, artificial intelligence (AI), automation, robotics, digitalization, et. al. have not been among the most popular trades in past one decades. The reason could perhaps be that most of these solution might be imported and not locally developed. (I may be guilty of overgeneralization here, but I find it ok, since it is the main point here)

I have seen many market experts and reputable stock pickers, suggesting big bets on companies dealing with these buzzwords. Some of their ideas have worked. But most of them have not, so far.

I believe that given the advancement already made in these fields elsewhere, it will be tough for the latecomer Indian (or any other emerging) companies to take pole position in these fields.

I am therefore convinced that in Indian context the primary trade may lie in the beneficiaries of these trends rather than the solution providers, who continue to remain marginal players in the overall global context. However, if some business shows excellence in these areas, that could be certainly added to the investment portfolios.

Insofar as I am concerned, my buzzword for Indian businesses is 'Re", especially in view of the recent regulatory changes.

Re-skilling, Re-locating, Re-evaluating, Re-building, Re-organizing, Re-structuring, et. al. are the trend that will create meaningful business opportunities in one decade or so. Re-orienting businesses to new tax paradigm and Re-organized real estate business would be important part of these trends....to continue tomorrow

Tuesday, July 25, 2017

In search of ideas

Thought for the day

"It may be true that you can't fool all the people all the time, but you can fool enough of them to rule a large country."

—Will Durant (American, 1885-1981)

Word for the day

Polemic (n)

A controversial argument, as one against some opinion, doctrine, etc

Malice towards none

Could you also hear a clear, shrill and unpleasant sound of sexism and machoism, in all this extraordinary praise for women cricket team?

Somehow I did!

First random thought this morning

His Excellency Pranab Mukherjee has completed one of the most non-controversial stints at Raisina Hills. I have not heard anyone complaining about his conduct as President of the Republic of India. To the contrary, most people are appreciative of the fact that he restored the dignity of the post, that was arguably damaged by his predecessor to some extent.

Now, if I juxtapose this status with all controversies, conspiracies and allegation that have surrounded His Excellency in past four decades, I get a conviction - "everyone deserves a second chance".

In search of ideas

Artificial intelligence (AI), automation, robotics, digitalization, et. al. are amongst the most popular buzzwords these days. In fact this jargon started gaining currency immediately after the global financial crisis started in 2008.

To me, the primary idea behind all this is threefold—

(a) To manage the worsening demography in developed economies, by delegating the mundane functions of life to machines.

I see this as an extension of the trend seen post two great wars. In those two wars millions of young men died, and it was felt necessary that women of the house should join the work force to rebuild the shattered economies. Washing machines, dish washers, microwave ovens, contraceptive pills (to avoid frequent pregnancies) ready to eat packaged food, equal rights to women, diversity, inclusiveness, etc. were amongst the scores of ideas that were conceived, innovated and implemented to successfully increase the size of the work force.

Today, many European countries, Japan and even USA to some extent, are struggling with rising population of old and infirm. China shall also join them in a decade. This trend (i) is constricting consumption, savings & investment; and (ii) creating need for human substitutes to perform the commercial and personal functions, like nursing and driving etc.

(b) To enhance productivity. While we have achieved superior speed and efficiency, in the post war period the basic innovations have taken a back seat. Improvement is the key word rather than innovation. So much so that we have no hesitation in calling an appliance which is primarily a combination of a communication device, a camera, a music player and a personal diary, the most brilliant innovation of the millennium so far.

Enhancing the speed and accuracy of the work done is the focus so as to make the processes more productive, essentially meaning deriving more output per unit of capital and labor input.

(c) Cost efficiency. The elementary reason for the latest global financial crisis, in my view, was that a whole lot of people and governments had got used to spending more than what they were earning. Piles of debt with low capacity to service it resulted in a breakdown of the system.

In the interim, central bankers have taken care of the situation by printing more money and making it available at lower or negative interest rate. But a sustainable solution can be achieved only in two ways - (i) earn more; or (b) spend less.

Earning more may not be an option for many due to adverse demography, poor investment (hence job) climate and low inflation. Spending less is therefore naturally the preferred choice. Cost reduction (cheaper food, medicine, housing, travel, wages) is therefore more acceptable. Hence these buzzwords....to continue tomorrow

Friday, July 21, 2017

Beyond Sensex

Thought for the day

"We are punished by our sins, not for them."

—Elbert Hubbard (American, 1859-1915)

Word for the day

Ovine (adj)

Pertaining to, of the nature of, or like sheep.

Malice towards none

If things go as per plan, it will likely be NaMo vs NiKu contest in 2019, and a long European vacation for RaGa.

First random thought this morning

Government wants to sell Air India. Good intention.

Government wants to consolidate PSU upstream and downstream petroleum companies. Good idea.

Government wants to consolidate PSBs. Good strategy.

Government will continue to exercise control over management of these enterprise. Poor idea.

Why not make a super holding company. Transfer all government holdings to that company, and let individual companies be managed professionally, without any interference from the government.

Beyond Sensex

"Though stock markets in general are meaningless and indicate nothing in terms of the health of the economy they still function as a form of hypnosis, or a kind of Pavlovian mechanism; a tool that central bankers can use to keep a population servile and salivating at the ring of a bell. As I have mentioned in the past, the only two elements of the economy that the average person pays attention to in the slightest are the unemployment rate and the Dow. As long as the first is down and the second is up, they aren't going to take a second look at the health of our financial system.

Historians and economists often wonder after the fact how it was possible for so many "experts" and others to miss the flashing red lights leading into market implosions like that which occurred in 2008. Well, this is exactly how; within any casino there is an inherent bias towards false hope. Meaning, many people will invariably ignore all negative factors and past experience because positivism is more pleasant." —Brandon Smith (click here to read more)

If I close my eyes to the Sensex graph which is touching new highs every day, believing in the great Indian turnaround story is not that simple. One will have to make tremendous effort to sift out the absolute positives that will make an investor euphoric about Indian economy.

The relative argument — "We are doing better than most others" or "we are the fastest growing economy" — make one comfortable. But when put to litmus test, many of these argument sound academic. For example, Indian economy growing over 7%, the fastest in the world, may be matter of pride. But is the real per capita income of the bottom 50% of the population is also growing meaningfully, leave alone the fastest.

The changes in indirect tax structure and greater transparency in the administration (especially in relation to real estate sector and bankruptcy proceedings) are two major positives, which I could sift out. Most other measures, claimed to be landmark reforms, may not actually qualify to be so.

For example, the scheme to provide LPG connection to BPL families, could easily degenerate into kerosene subsidy type situation, with even larger burden on the exchequer. Similarly, the UDAY scheme to restructure state electricity boards could also degenerate like all other previous restructuring episodes.

The lending rates are falling because of poor credit demand and wide spread with global markets. This is a cyclical phenomenon and would get obliterated by play of market forces. Some businesses will gain and some will lose in the routine process. There is nothing to be structurally positive about this.

The socio-economic divide is widening at much faster rate than ever in past seven decades. That is a structural negative to be worried about. I say it structural because it's a trend in most developed democracies, and none has been able to solve the conundrum.

Unemployment, underemployment and disguised unemployment are all rising at an accelerated pace. This could be cyclical phenomenon, but may create some structural issues like rise in crime rate, cases of depression and other mental disorders, widening regional disparities, etc.

Coming back to stock markets, the following Sensex EPS forecast chart from a research report of BofAML, tells you the whole story.

What it shows is that the analysts have always been projecting a rosy picture of the corporate health. The projections though believed by the market have been seldom realized.

Thursday, July 20, 2017

Who needs more investment?

Thought for the day

"Genius may have its limitations, but stupidity is not thus handicapped."

—Elbert Hubbard (American, 1859-1915)

Word for the day

Etymology (n)

A chronological account of the birth and development of a particular word or element of a word.

Malice towards none

Why this pretense that President, Governor and Vice President are nonpartisan?

First random thought this morning

I met a midsized chemical company's management last week. The people were generally very bullish on the prospects of their business in near to midterm.

When asked about "what could be the key risk to their business outlook"; the instant reply was 'Modi not winning election in 2019".

When I asked them what specifically the incumbent government has done to promote their business and that could change if Modi is not re-elected in 2019, I got no reply.

Who needs more investment?

Relative to equities, commodities are trading cheapest in many decades. This divergence is there despite the fact that a large proportion of traders are betting on a global reflation trade since past six months at least.

The primary premise underlying the so called reflation is that the money sloshing around the world will begin to find its way in the capacity building and inflation will eventually rise. The rise in inflation shall lead to lower bond prices and higher equity and commodity prices. This also implies that the commodity producing currencies shall gain and the commodity consumers should lose. The economic cycle thus turn from buyers' dominance to sellers' dominance; and from borrowers' dominance to lenders' dominance.

In past six months—

· Equity prices have risen considerably in most markets. Emerging markets equities, where growth is visibly higher, have done better than developed market equities which are still struggling with growth.

· Emerging currencies have done better than developed currencies.

· Bonds in emerging markets have also outperformed the developed markets.

But there is nothing to suggest that growth is accelerating to a level where inflationary pressures will kick in.

This raises doubt on the very premise of the reflation trade. Especially when the central bankers across developed market are talking about raising rates and shrinking balance sheets.

The capacity utilization across geographies and sectors is much below optimum. And fiscally most governments are still challenged. The specter of sub-prime loans and froth in asset prices has also started to raise its head again.

Under these circumstances a trade based on presumption of higher investment looks slightly questionable. ....to continue

Wednesday, July 19, 2017

Literature over history

Thought for the day

"To avoid criticism, do nothing, say nothing, and be nothing."

—Elbert Hubbard (American, 1859-1915)

Word for the day

Harrumph(v)

1. To clear the throat audibly in a self-important manner.

2. To express oneself gruffly.

Malice towards none

Digvijay Singh is doing 3300km Narmada Parikarma and Lalu Yadav's family is performing a variety of religious rituals.

It is comforting to note that in India, still "Secular" does not mean "Non-believer".

First random thought this morning

A number of opposition parties in India facing existential threat. They can clearly see that another term for the incumbent government will materially erode their base. They are therefore naturally in a hurry to unite so that they could at least present a realistic challenge to PM Modi.

The unfortunate part is that in their desperation, they seem to have forgotten that they would need an aggressive development agenda to beat PM Modi. Mere "Modi hatao" slogan may not be sufficient.

Literature over history

The latest OECD Economic Outlook forecast (see here) succinctly summarizes the "New Normal" in just one paragraph, as follows:

"The mood in the global economy has brightened during the last year. Confidence indicators, industrial production, headline measures of employment, and cross-border trade flows have improved in most economies. However, this still-modest cyclical expansion is not yet robust enough to yield a durable improvement in potential output or to reduce persistent inequalities. Financial vulnerabilities could be realised by policy and geopolitical shocks. Compared to the 20-year pre-crisis average against which expectations have been set, OECD per capita GDP growth remains over ½ percentage point weaker and global growth overall, projected to rise to just above 3½ per cent by 2018, also lags. In sum, the global economic outlook is better, but not good enough to sustainably improve citizens’ well-being."

The economic growth for OECD countries is expected to stagnate around 2% level, at least till 2018. Whereas, for non-OECD nations, it's expected to rise to 4.8% in 2018. Overall world growth is not expected to remain stagnant around ~3.5% during 2017 and 2018. Most of the non-OECD growth is coming from just three G-20 members, viz., India, China and Indonesia; though China is likely to continue decelerating from 6.9% in 2015 to 6.4% in 2018. India is also projected to grow at lower pace from 7.9% in 2015 to 7.7% in 2018.

The OECD outlook report shows that economic inequities in developed countries have risen sharply post global financial crisis in 2008.

...as the real wage growth remains much below the pre-crisis averag

Wide acceptance of lower growth and higher concentration of economic power may not be a simple economic phenomenon, in my view. This may likely have far serious repercussions.

For one, it threatens the very core of the developed world, i.e., democracy and free markets.

Two, the New Normal, seeks to accept the dominance of Economic Elite over condescending administration.

Three, it strengthens the social dissent, that is presently manifesting in seemingly irrational socio-political decisions like Brexit & election of Donald Trump and stray incidents of violent strikes. This dissent may at some point explode to take form of a more violent, more popular and much larger movement. I am reading literature written during 1890-1930 to find clues. For history books look inadequate in presenting the true picture....to continue

Tuesday, July 18, 2017

Maintain proportion

Thought for the day

"Do not take life too seriously. You will never get out of it alive."

—Elbert Hubbard (American, 1859-1915)

Word for the day

Uptalk (n)

A rise in pitch at the end, usually of a declarative sentence, especially if habitual.

Malice towards none

Have seen or heard of Digvijay Singh lately?

First random thought this morning

"Good is a noun. That was it....Good as a noun rather than an adjective is all the Metaphysics of Quality is about. Of course, the ultimate Quality isn't a noun or an adjective, but if you had to reduce the Metaphysics of Quality to one sentence, that would be it." — Robery Pirsig in LILA

I feel that this book should be made mandatory for all politicians, media persons and civil society members. "You have done much worse than me" should not be tolerated in defence of any action or argument.