"There are some people
so addicted to exaggeration that they can't tell the truth without lying."
—Josh Billings (American,
1818-1885)
Word for the day
Nocent (adj)
Harmful, Injurious
Malice towards none
How the end of H-4 VISA will
impact social fabric of India?
First random thought this morning
Salman Khurshid is latest in the series of Congress and BJP
leaders who have chosen to diverge from the party line and speak their mind.
This makes two things very clear:
(a) Rahul Gandhi is
inspired by PM Modi. He is building a team of his own, sidelining many of the
senior party members, who chose not to "totally" agree with him.
(b) The line separating
Congress and BJP from each other can now only be seen by NASA satellites, just
like Ram Setu.
Valautions not a comfort
Continuing from yesterday.
Another argument of Greed & Fear, I disagree with is that
lower corporate profit to nominal GDP ratio to some extent mitigates the risk
of high valuations.
Greed & Fear admits that "Valuations remain high, most
particularly in the mid-cap space, though not as high as they were at the peak
earlier this year. The Nifty Index and the Nifty MidCap 100 Index now trade on
17.5x and 21.3x one-year forward earnings, down from a peak of 18.6x and 25.2x
reached in January and late December respectively."
It however argues that "the mitigating factor continues to be
that corporate profits as a percentage of nominal GDP remain comparatively
depressed, declining from 7.1% in FY08 to 3.0% in FY17 and an estimated 3.1% in
FY18."
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The primary reason identified for this trend is "the continuing lack of a new investment cycle."
The report argues that "corporate profits as a percentage of
nominal GDP peaked in fiscal 2008 which was the peak of the last investment
cycle."
The conclusion drawn is that "the Indian stock market can
move much higher if there is a renewed investment cycle."
The authors finds enough collaterals like 20% rise in February
2018 IIP, 31% increase in domestic vehicle sales in 1Q2018, 12% growth in
overall credit in 4Q2017 and 11% in 1Q2018, etc. He however admits that
convincing evidence of a new investment cycle remains lacking.
I have many reservations about this argument. For example—
(a) I believe that the
capacity utilization level in Indian industry is presently far from being
supportive for a new investment cycle.
(b) There is serious risk
of multiple disruptions (compliance rules, taxation, technology, changing
consumption patterns and global competitive landscape, etc.) resulting in lower
aggregate profitability for Indian corporate sector in near to midterm.
(c) Structural changes in
cost structure - higher compliance cost, rise in minimum wages, higher cost for
natural resources, higher cost of capital, etc. do not augur well for sustained
higher profitability which has been seen historically.
(d) Lower profitability is
also a result of structurally lower margins, as competitive intensity rises
with opening of the economy.
(e) This argument
completely ignores the rise in private equity investments. In Indian context
for example, the equity investment in self owned enterprise and home equity has
risen sharply in past one decade, as compared to the decade prior to that.
Besides, the size of unlisted private businesses has increased significantly.
Factor in the investments of Amazon India, Vodafone India, PayTM, FlipKart,
Honda India, Hyundai India, LG India, Samsung India, Apple India, etc. and you
will find this ratio running much higher than what the data for listed
companies suggests.
Moreover, the revival of huge amount of stressed assets may also
obliterate the need for further investment in core sectors like cement, steel,
power and telecom.
I find little reason for Indian equities to continue enjoying huge
premium over other large emerging markets or many of the developed markets over
medium term. The valuations therefore may still be on the higher side of the
fair value bar.
To some my arguments may sound naive and untenable, as I am just a
small investor not an expert analysts or strategist. But I would still prefer
to work on my largely intuitive analysis.....to continue tomorrow
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