Some food for thought
"Votes should be weighed
not counted."
—Friedrich Schiller 9German
Dramatist, 1759-1805)
Word for the day
Furlong (n)
A unit of distance equal to 220 yards (about 201 meters)
First random thought this morning
Would like to share the following observations made during a
trip to Uttar Pradesh last week.
The good
(a) The highway network
in the state is improving materially with each passing day. Some of the
highways in economically backward eastern part of the states are truly world
class. In particular, Lucknow-Faizabad highway is noteworthy for its quality.
Varanasi-Kanpur and Lucknow-Agra-Noida expressways can compete with any global
highway.
(b) The larger towns
like Lucknow, Prayagraj, Kanpur, Bareilly, Agra etc. had moved up the
consumption value chain long back. Most tier II and III towns are catching up
fast. The traces of large telecom, white goods, ready to eat snacks, apparels,
home improvement, construction material brands could be abundantly found here.
(c) Though traffic
is chaotic like before, but the traffic police have made appearance in many
smaller towns.
(d) The best part was
the sight of young girls (in large groups) riding bicycles to schools in even
remotest parts of the state. I could see them everywhere - in cities, towns,
hamlets, villages, on muddy village paths, on concrete highways; everywhere.
They appeared enthusiastic and fearless. This gives a lot of hope.
(e) The village
houses are increasingly becoming pucca (brick and mortar).
(f) Small solar
panels, tractors, motor cycles now appear normal. Saw no more than 20 bullock
carts during a total 2000kms drive.
(g) Fields were all
green and most rivers had some water.
The bad
(h) Farmers have not
yet received the cane payments for last crop. Many of them are being forced to
sell their current cane crop to jaggery producers at about 50% of SAP. Farmers
are also not getting full MSP for the current Kharif harvest. Farmers have not
received insurance claims for the crops destroyed by floods this summer.
(i) Poor cash flows
for farmers are reflecting in the demand for many discretionary items. Markets
all across lacked the usual festive look seen during Diwali days.
(j) The traffic in
cities and towns is becoming more chaotic and cacophonic with each passing day.
There appears virtually no emphasis on civic training and discipline.
(k) There is
virtually no investment in preserving and promoting the traditional knowledge,
culture and legacy.
The ugly
(l) The ban on beef
has resulted in huge number of cows being stranded on roads, almost everywhere.
Forced to feed mostly on garbage, the cows are choking to death by eating
plastic. The mountains of garbage, adorned with polythene, are visible in
almost all cities, towns and villages; the capital city Lucknow and holy city
Varanasi, being no exception.
Shall give a detailed account in few days.
Are retail investors falling in trap, yet again
Last week AMFI (Association of Mutual Funds in India) issued
monthly data of mutual fund flows for October 2018. The data suggested that the
inflows in equity schemes (including arbitrage funds) of Indian mutual funds in
October, at Rs12,622cr, were highest since April 2018.
Given that October was one of the worst month for Indian stock
markets in recent times, the data has evoked keen interest from market
participants. The mutual fund industry in particular has seen this data point
as a vindication of its sustained campaign to encourage investors to invest
through mutual funds.
The data is also being used as a strong argument in favor of the
continuation of domestic flows into the Indian equities. It is pertinent to
note that strong domestic flows into mutual funds in past couple of years are
widely seen as the counterforce to the persistent FPI outflows, and one key
factor in the outperformance of Indian equities for better past of 2017 and
2018.
I would usually not bother about these monthly numbers and short
term trends. However, given the intensity with which market participants are
trying to derive support from this data point, I find it pertinent to highlight
the following three observations.
1. Despite a higher
absolute number of equity flows in domestic mutual funds, the AUM of equity
funds as a percentage of total market capitalization recorded its first
meaningful fall in October 2018.
2. The share of high
networth household investors (HNI - usually termed as smart money) in total AUM
of mutual funds has barely reached the March 2009 levels, whereas the share of
smaller household investors (Retail - usually considered to be the trend
followers) is almost 4 times the level of March 2009.
Moreover, the quarter ended September 2018 witnessed fall in
average HNI equity MF holding to Rs12,45,522 from Rs13,05,593 at end of June
2018. The average holding for Retail investors rose by almost 60% to Rs1,19,328
at end of September 2018 from Rs74,083 at end of June 2018.
3. The inflows into
Indian funds have markedly slowed down in FY19 as compared to FY18.
- During April-October 2017 period MF witnessed a net inflow of Rs2.53trn. In the corresponding period this year net flows have been almost one third of that at Rs812bn.
- Moreover, in this period last year, flows into liquid funds were just 6% of the total flows. This year the ratio of liquid to total is 130%.
- Net flows into pure equity funds are almost the same as last year. However, if we include arbitrage funds, the net flows this year (Rs.693bn) are almost 24% lower than last year number (Rs913bn)
- Income funds have seen a net redemption of Rs1.23trn, vs. a net inflow of rs783bn last year.
In conclusion, I find the April-October mutual fund data a
reason to worry for the market for the following two reasons:
(a) The basic premise
of the whole mutual fund campaign is that the investors must not try to time
the market and invest on regular basis.
However, the data for April-October suggest that people have
tried to time the market in both debt as well as equity. For one they appear to
have sold their existing mutual fund holdings and increased their SIP
anticipating a market fall in run up to 2019 elections. Secondly, they have
violated their asset allocation by redeeming debt funds anticipating a further
rise in interest rates. The money is mostly kept in (cash) liquid funds.
(b) The supposedly
more informed investors have materially reduced their exposure to the Indian
equities, along with global investors. Whereas, the smaller investors who
usually join the trend late, have materially increased their exposure to Indian
equities.
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