Some food for thought
"In every tyrant's heart there springs in the end this
poison, that he cannot trust a friend."
—Aeschylus (Greek Poet, 525BC-456BC)
Word for the day
Totsiens (interjection)
Until we meet again; goodbye.
First thought this morning
These days whenever you open a popular website, like newspaper
etc., you are most likely to face a pop up that highlights the
"performance" of the incumbent government, with a picture of the
prime minister himself.
A cursory look at the performance score card indicates that a
variety of government schemes have "transformed" the lives of more
than half the population of India.
Given that BJP got around 17cr votes for its 282 Lok Sabha seats
in 2014, a 350+ score should be a cake walk for it since it has made a
transformative difference to so many more lives in past 5years.
But recently concluded assembly elections do not vouch for this
eventuality. The argument of BJP that they could not adequately communicate the
performance of the government to people sounds lacking in substance.
Why would you need to tell a beneficiary of government scheme,
that he or she is actually a beneficiary of the government benevolence!
Would people not know by themselves that they have a free LPG
connection, a pucca house, a Jan Dhan Account, insurance cover for family and
crop, free treatment at good hospitals, all weather roads connecting their
village to the outside world, MUDRA loan to run business, clean toilet within
their home to relieve themselves, electricity to enlighten their house, and
money in their bank account under DBT and pension schemes?
Moreover, how Rs15.17trn of GST collected is an achievement of
the central government. For one it is mostly a state effort; and two it is well
below the target.
Chart of the day
Are driver of our market valuation sustainable?
A number of stock markets globally have entered a technical bear
market in past couple of months. However, in many cases the performance of
stock market may not be mirroring the real economic conditions, especially the
well being of the people.
For example, consider the German stock market.
Germany's benchmark stock index (DAX), the broadest stock index
in whole of Europe, slumped into bear market territory last month, falling more
than 20% from its January 2018 peak. DAX is now trading at the lowest level in
more than two years.
Fundamentally speaking, Germany is almost at full employment;
maintaining a surplus on current account, trade account and fiscal balance. It
offers total social security to citizens. Policy rates are at Zero. Business
confidence has fallen a bit in past few months, but is still positive. Both
manufacturing and Services PMIs are also still in expansion mode. Corporate tax
rates are moderate. The government debt to GDP is also sustainable.
This is a classic example of disconnect between economic well
being of people and stock markets. This also highlights that linking macro
fundamentals proportionately to stock market performance could be mostly
fraught with avoidable risk.
Another critical question every investor needs to examine, is
why India despite being one of the relatively mismanaged economies, with high
prevalence of corrupt practices, poor rate of technological development,
lacking in even elementary social security for citizens, enjoys a premium over
economies like Germany, insofar as stock market valuations are concerned.
An overwhelming proportion of analyst accord significance to
India's valuation premium, and advice buy whenever the premium falls below the
historical averages.
A number of plausible explanations are given to justify this
valuation premium. The most popular being the following:
Consumer vs. producer
The most popular explanation is that in the post cold war
globalized world, the collective wisdom of stock markets has always rewarded
consumption more than production. Therefore, the consumer markets like India
and US have enjoyed premium valuation over the producer markets like China,
Japan, Korea and Germany, despite running current account and fiscal deficits.
Perhaps, the producers invest a part of their trade surplus back in the
consumer stock markets to create a sense of well being to motivate the
consumption demand.
High growth
Another reason cited for the premium of India's stock market is
the promise of high economic growth.
However, even if we accept the official data as perfect, the
growth on per capita income basis has been subpar for decades. In past one
decade per capita GDP (on PPP basis) has grown @5.4%CAGR, on a very low base of
US$315/month in 2008, and that too with material rise in income and wealth
inequality. The average per capita GDP on PPP basis during the period between
1990-2017 has been less than US$300/month, and presently stands at
US$510/month, a measly 36% of the global average.
Flexibility in compliance
The disclosures in past one decade or so suggest that the lure
of flexibility for corrupt practices, in terms of tax avoidance, money
laundering and non compliance, could have also motivated some investments in
Indian stock markets.
As someone said "people with money empathize the
entrepreneurial spirit of corrupt".
The point to ponder now is that almost all these factors appear
challenged.
The world appears moving from "globalization" to
"nationalism". Accordingly, the Indian government is also emphasizing
on import substitution with "Make in India". This shall diminish the
importance of India as global consumer.
The promise of high growth has almost waned. India appears
settled for 7-8% growth trajectory, with 5-6% per capita GDP growth in midterm.
Rising household leverage and poor employment prospects do not augur well for
rise in private consumption in the near term, notwithstanding the promised
fiscal profligacy.
The tightening compliance and surveillance systems would require
more transparency in foreign flows in years to come. The practices of round
tripping through P-Notes etc. may not remain viable any longer.
I would like to ask the readers and other investors, "under
these circumstances what they think would help Indian stocks sustain their
premium valuations over their global peers?"
This is important, since we may see many new age businesses with
no or low profitability but large market capitalization listing for public
trading in next few years. This shall distort the aggregate market valuations
further, at least on conventional parameters.
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