Friday, November 30, 2018

Stay cautious, regardless

Some food for thought
"I'm not afraid of storms, for I'm learning how to sail my ship."
—Louisa May Alcott (American Novelist, 1832-1888)
Word for the day
Keek (v)
To peep; look furtively.
 
First thought this morning
Noted industrialist Anand Mahindra triggered an interesting debate on Twitter with his suggestion as to who should first be landing on Mars.
"A human landing on Mars is now not far away. I only hope the first wave of explorers will be poets & not real estate developers", Mr. Mahindra tweeted earnestly.
Taking the thought further, the enterprising Elon Musk added, "Engineers, artists & creators of all kinds. There is so much to build."
Agreeing to Mr. Musk's thoughts, Mr. Mahindra insisted, "Indeed. But let’s make sure the poets are in the first ark. Or there’ll be no one to make sense of why we’re there..."
Curious what normal people would say about this, I decided to check with few people, including NRIs in US, Canada, Singapore and Dubai.
No prizes for guessing their response. All of them unanimously want Indian politicians to migrate to Mars. A few from US want Trump's to join them too.
I do not know how to react to this. Is this level of skepticism good for any society? Why are not people looking forward to successful and positive people for inspiration? Why the negativity in the political arena is so overwhelming?
I also wonder, do we have any case for not banishing media (Social, Print, Electronic) from our day to day life and get back to books!
But while we are still hooked to media, happy to note Rakhi Sawant is apparently marrying next month in Los Angeles, and King Khan has agreed to bless the couple in person!
Chart of the day

 
Stay cautious, regardless
Interest rates are perhaps the most commonly used monetary policy tool globally. The central banks world over lay maximum emphasis on policy rates to achieve the objectives of their respective monetary policies. The financial markets and fiscal & development policy makers accordingly keenly watch the movement of policy rates.
Every public statement of central bank officials is minutely analyzed to discover the hints of changes, if any, in the central bank's policy stance. Significant trading best are placed based on the interpretation of these statements. However, there is no empirical evidence to establish the profitability or otherwise from instant market reactions to the purported "hints" dropped by central bank officials or any policy maker for that matter.
I am also trying to find any meaningful study that has been carried out to establish the relative superiority (or efficacy) of policy rates over other monetary policy tools used by the central bankers in achieving their policy goals.
In the latest occurrence of this phenomenon, the global markets have gone ballistic after a speech of the US Fed chairman Jerome Powell was widely interpreted to mean that the US central bank may pause hiking rates, as the policy objectives of price and growth stability has been achieved.
Indian markets is almost 5% higher since last RBI policy announcement, in which the Monetary Policy Committee decided not to hike the rates, and hinted that growth and prices may be cooling. In fact, steep fall in energy prices and less than projected inflation, has motivated lot of long positions in financials and rate sensitive stocks, assuming that RBI may stay put or even cut on 6 December 2018 meeting.
Not an economist myself, and certainly not a monetarist, I however wonder, how anticipation of growth peaking and showing definite signs of slowing could be a matter of celebration for equity investors. Particularly, when it is widely accepted that—
(a)   The current valuations of sectors and stocks leading the market charge (both in India and USA) is mostly on the higher side, almost flirting with bubble territory.
The argument that since the growth trajectory henceforth is going to be much flatter therefore higher price earnings multiples (PE Ratio) may be accepted as norm is not palatable to me because, this tenet is being applied selectively. Half the market that is trading below historical average valuations are being conveniently excluded from the benefit of this gratitude.
(b)   The current growth cycle has been mostly by credit driven consumption. Little new capacities have been added despite near zero interest rates for a very long period. The potential growth curve may have moved materially lower and growth is peaking at a level that will leave little incentive for anyone to add capacities in midterm.
Moreover, the elevated level of household credit and fiscal profligacy, even by the troubled economies like Greece, suggests that the central bank commentary may change like Mumbai weather - from a "sustained hike" to "need for accommodation (QE)" in no time.
In the meantime, there is a strange contest opening in India. Rhyming with "my shirt is whiter than thou", politicians in India are sparring over historical growth trends. If they believe that voters will look at GDP growth charts before going to polling station, they might be seriously mistaken. Moreover, the comment of former finance minister indicates that the life of NITI Ayog may be limited to the tenure of incumbent PM in office. This adds further to the unpredictability and uncertainties, Indian economy is currency facing.

Wednesday, November 28, 2018

Perception vs. Reality

Some food for thought
"Governing a great nation is like cooking a small fish - too much handling will spoil it."
—Lao Tzu (Chinese Philosopher)
Word for the day
Yahoo (n)
A boorish, crass, or stupid person
 
First thought this morning
There are many windows in my abode, large and small,
facing each direction.
One window welcomes a brilliant new Dawn — every morning,
the other bids adieu to the golden chariot – every evening.
One brings cool easterly breeze,
the other ushers nourishing westerly winds.
Alas! I see nothing.
Sun rises and sets behind thick curtains,
without anyone noticing it.
Winds blow away from our house,
passing without touching anyone.
We like mechanically conditioned air,
avoiding any direct touch with Mother Nature.
Sometimes though a tiny window in bathroom is left open,
and Mother sneak in her blessings!
Chart of the day

 
Perception vs. Reality
Yesterday, I got an opportunity to attend a gathering of some reputed market experts. The topic of the discussion was emerging political scenario and its likely impact on financial markets. Since, no one could say with confidence what is going to be the outcome of elections, the discussion was mostly hypothetical and deeply influenced by the personal prejudices and political inclinations of the participants. Nonetheless, the consensus appeared that political establishments do influence the stock markets.
Being a small insect myself, I usually do not like to engage in debate with the experts, nonetheless, I find compelled to note the following. It is pertinent to note I have always insisted that politics in India has almost nil correlation with the performance of the economy and therefore stock markets. I am presenting this data just as some food for thoughts without implying anything. Please trust me.
The results of the general elections for the current Lok Sabha were declared on 16 May 2014. Since then, Nifty has compounded at an annual rate (CAGR) of 8.7%.
In this period the nominal GDP of India has grown at ~10.5% CAGR. The net national disposable income has also grown at almost similar rate. The nominal gross value addition in agriculture and related sectors in this period has grown at ~7.7% CAGR, while for industry GVA growth has been ~9.7% CAGR and Construction GVA has grown at ~10.8% CAGR.
The stock market has obviously underperformed the economic growth in past four years. This sounds counterintuitive, if I accept the argument of a strong majority government with dynamic leadership being inarguably good for stocks markets.
A granular look at the stock market performance since May 2014, further raises some doubts on unconditional acceptability of this hypothesis.
Going by the public assertions, three core areas of focus of this government have been self reliance (Make in India), inclusion (JAM), and aggressive infra development (Roads, Railways, Power, etc.). However, if try to correlate these focus areas to stocks market response, we get a different picture. Since 17 May 2014:
(a)   Infrastructure sector has given a negative return of (-)0.2% CAGR. This does not corroborate the construction sector GVA growth at 10.8% CAGR.
(b)   Public Sector Banks, who with wider reach must have been the largest beneficiaries of the financial inclusion efforts, have returned (-)4.9% CAGR.
(c)    The government promised full autonomy and professional management of PSUs. Thousands of investors were lured into buying CPSE ETFs based on this promise. NIFTY CPSE has returned (-)4.5% CAGR.
(d)   MNCs have returned the best return (16.6% CAGR) despite all talks of swadeshi and self reliance.
(e)    Private sector banks which are largely foreign owned have returned more than 15% CAGR.
(f)    Despite all the protection measures, metals have returned just 1.1% CAGR.
(g)    Consumption sector has returned 13.4% CAGR. This reflects consistent fall in household saving rates, despite 10.5% CAGR rise in disposable income. My anecdotal experience is that aspirational consumption is driving India consumer sector, and distorting the household balance sheets. Sharp rise in household credit in past few years supports my observation. The consumption boom may therefore be unsustainable unless matched with matching investments that will lead to higher household income in midterm.

Tuesday, November 27, 2018

Leave nothing for later

Some food for thought
"A fool must now and then be right, by chance."
—William Cowper (English Poet, 1731-1800)
Word for the day
Tsuris (n)
Trouble; Woe
 
First thought this morning
On the 10th anniversary of the heinous Mumbai terror attack, the mood in Mumbai at least should have been somber. But it did not appear to be. Save for some customary official rituals and mostly sartorial tweets, Whatsapp forwards, and FM radio notes, nothing much was visible. Outside Mumbai, no one seemed concerned any bit.
A close observation of the Mumbai city behavior highlighted that the only thing that has changed in the city is the public entry procedures in large hotels. There are X-ray machines to scan the baggage of people entering the premises and a couple of security guards with automated weapons. It is mostly a small enhancement to the procedures followed since the terror strikes in 1993.
There is little change in the attitude of people towards the security of public areas, except that they appear little more tolerant to the scanning at the entry to hotels and malls.
There is little effort in training of security staff deputed at public places. Most of the "guards" are outsourced from placement agencies. They have little commitment to the place they are guarding or the outsourcing agency itself. They are inadequately trained. I managed to speak with 10 odd guards who are deputed to check the vehicles entering the premises. None of them has ever seen an explosive device. They open and shut the car bonnets and trunks mechanically without knowing what they are searching for. Women and minors are usually let go without proper search. Moreover, the guards are usually not fit to fight trained terrorists.
None of the establishment that were targeted during 26/11 have a professional "security audit" in place, to continuously assess the lapses in security procedures and upgrade in the system to equip for emerging security threats and challenges.
If the two police personnel, I managed to speak with, are to be believed, they have received just a few reports from people about the suspicious activities in their surroundings in past 10years. Worst, many of such reports have turned out to be mischievous.
We the people need to accept and imbibe that praying to god alone would not be sufficient. To protect our life and property, we would need to develop an attitude and adequate security apparatus.
Chart of the day
 

Leave nothing for later

The government of India has laid significant emphasis on the "ease of doing business" matrix in past few years. Consequently, the ranking of India on the World Bank's Ease of Doing Business Index has improved to 77 from 142 in 2015. This may in fact have resulted in material change in the perception of the global businesses towards India, as evident from the incrementally higher FDI flows in the country.
A closer study of the improvement in India's ranking suggests that the following three factors may be responsible for most of it:
(a)   Development of the telecom infrastructure, especially availability and speed of internet. This has helped significantly in reducing the time & effort taken for various procedures and services, and improving the transparency of the procedure itself. A lot of services are now provided online. ISRO and entrepreneurs/investors who invested hugely in developing telecom infrastructure in past 25years; and IT companies who developed enabling systems and software share the major credit for this.
(b)   Improved physical infrastructure, especially electricity and logistics. This is consequence of the massive investment in energy, roads, and ports/airports sector in past two decades, after these sectors were deregulated and freed from government monopolies. NDA -1 government led by AB Vajpayee should get major credit for this effort.
(c)    Statutory changes like GST and IBC have also contributed materially in the improvement in India's ranking. The incumbent government in particularly gets credit for these changes in the legal and regulatory framework, even though the past governments and a host of professionals who worked tirelessly to bring it to the implementation stage also need to be commended.
One thing that has not changed, or has arguably worsened, in this context is the transparency and predictability of the regulation. Some unconventional policy measures like demonetization; frequent changes GST framework, unnecessary tinkering in the direct taxes, e.g., taxation of LTCG, imposition of a variety of cess, indiscreet use of enforcement procedures, etc may have made the investors and businesses wary of the intent.
I would cite one small example that indicates lack of holistic thinking on part of the government in development and management of the regulatory framework for the business, making it subject to frequent and unpredictable changes.
It is widely accepted that e-commerce is the future of retail in the country. As per some estimates, the total ecommerce business in India may grow more than 2x in next four years to cross US$52bn form the present US$25bn.
Presently, more than 70% of the Indian ecommerce industry, at least in product retail, is dominated by the two US-controlled companies: Flipkart and Amazon.
The government had issued a draft National Policy on Ecommerce (see here) few months back. But reportedly, the plans to implement the policy have been shelved for now (see here).
The government has the global experience of more than two decades available to it. At national level also, it is more than a decade since we started buying online. The government has accepted that in future this sector is certainly going to grow exponentially. The litigations in the matters relating to taxation, pricing, quality control, customer services etc are piling with each passing day. Ad hoc solutions to all these issues will result in a messy regulatory framework, like in many other cases.
One issue in particular is bothering me in this. The last mile of the delivery chain in the entire ecommerce is totally uncontrolled.
A huge number of young boys have been employed to "deliver" the online shopping to the ultimate customer. There is absolutely no regulation for this entire workforce. Most of these delivery boys are contract workers, who in many cases are not even verified. They do not enjoy any job security, social security or any other benefit usually available to a worker in the organized sector. Many mafia type unregulated agencies have mushroomed, which control the supply of delivery boys.
Most of these delivery boys are under-paid, Some of these are also risk to the 'customer' to whom they are going to deliver.
Shockingly, the draft policy on ecommerce makes no mention of this segment of the ecommerce. The worst, the ministry of labor is not even mentioned as one of the implementing agency, in the draft policy document.
It appears that the regulatory framework for ecommerce delivery chain would evolve casually. Knee jerk reactions to each protest/strike by workers, accident, rape, murder, act of violence, etc. will add to the regulations, keeping it as unpredictable as anything else.


Trivia
India is popularly known as the diabetic capital of the world. It has the dubious distinction of having the largest population of diabetic people in the world. Many of the key politicians (including the union finance minister, union road minister, CMs of Delhi and Maharashtra and even BJP president) are known to be diabetic.
But only a few important metro stations in Delhi and Mumbai have provision for urinal. The famous 302kms long Lucknow-Agra expressway has no urinal.
How these diabetic leaders, could not think of the plight of millions of diabetic people whom they are supposed to lead and serve?