Some food for thought
"To begin, begin."
—William Wordsworth (English Poet, 1770-1850)
Word for the day
Delphic (adj)
Oracular; obscure; ambiguous
First thought this morning
The newly elected Member of Parliament from city of Bhopal, who
is incidentally facing some serious criminal charges, refused to sit in an NIA
court saying it is too dusty. I am not sure whether the court premises were
actually dirty and not suitable for human use, or the newly elected MP just
wanted to inform the court of her newly acquired constitutional privileges.
But that is not the point here. The point is that the Prime
Minister has emphasized on improving the 'Ease of Living" for Indian
citizens. A lot of his colleagues in the Parliament and co-workers in the
bureaucracy come from modest background. These people know very well the
problems a common citizen faces in day to day life.
The Prime Minister just needs to tell his colleagues and
co-workers to use their personal experiences and take some small measures to
improve living standards of common people.
For example, the MP from Bhopal can move a motion in the
Parliament to make Indian courts and jails suitable for human use. Cleanliness,
proper ventilation, safe drinking water, clean toilets, separate place for
lactating mothers, prayers, etc. may be made available to all people visiting
courts or confined to jails. She also must fight for a separate legislation
governing citizen rights to bail. Despite several Supreme Court judgments,
subordinate courts have refused to accept the bail as a right of accused.
The prime minister himself ought to know well the problems of
various users of railway platforms (passengers, vendors, porters, railway staff
etc.). He may like to advise the railway minister to work towards improving
experience of all users of railway facilities using his experience.
The MPs from smaller towns like Bareilly, Moradabad, Badayun,
Kannauj, Begusarai, Dumka, Gumla, etc. must know the inadequacies, hardship and
chaos, the citizens of these towns face every day. They must be advised to
share their experiences with policy makers and town planners to make the life
of common people in these towns easier.
Of course, this would be possible only if the elected
representatives stay connected to their roots refusing to be ingested by
privileged lifestyle of Lutyens' Delhi.
Chart of the day
JOMO vs FOMO
An unusually large number of global analysts and strategists
have warned against an imminent "crash" in stock markets. Most global
brokerages are suggesting that even if a rally does occur due to Fed cutting
rates aggressively to support growth, the up move in equities may not sustain
beyond a point.
As the Wells Fargo & Co's Pravit Chintawongvanich put it:
“Although stocks have rallied with lower rates, they may start
to sell off (or at least have limited upside) if rates keep declining.
At some point the upside from “bad is good” is limited. An
“insurance cut” scenario is already priced in, and would likely be positive for
stocks; the Fed cutting more than one or two times by the end of the year would
probably mean that the economy has significantly slowed and/or the trade war
has escalated."
In India also, a number of analysts are finding the current
level of markets unsustainable. I myself have been expected a deep correction
for past many months. There have been some shallow corrections that have not
sustained for long.
I therefore find it appropriate to take a deeper look at the
current market conditions.
The last time benchmark Nifty traded below 9000 mark was 27
months ago on 10th March 2017. I am drawing red line at 9000 mark because it is
close to ~18x FY19 fully diluted Nifty EPS of Rs488, which I intuitively feel
is the fair value mark for Nifty given the present earnings growth trajectory
and return ratios.
For past 27 months, Nifty has returned a yield of ~13% CAGR,
whereas the broader market index Nifty 500 has returned ~10% CAGR. The
benchmark 10yr government bond yields have averaged ~7.5% in this period.
My first thought on Indian markets is that no major move is
likely in near term. I have always believed Mr. Market is a rather cruel
person. It seldom obliges the consensus. Since a majority of market
participants are presently positioned for a correction, they are less likely to
get their wish.
Secondly, I find that Mr. Market might have already delivered
the correction when no one expected it to happen. It is just that we are
refusing to acknowledge it. Consider the following:
Since 10 the March 2017 when Nifty last traded below 9000 -
Only one third of Nifty 500 constituents have yielded 10% or
more return.
More than half of the Nifty 500 constituents have yielded a
return of less than the benchmark bond yields, and more than 40% have yielded
negative return.
Sector wise, Pharma (-22%); Auto (-16%); Metals (-4%); PSU Banks
(-6%); Other PSUs (-8%); have given negative return in past 27 months.
Infrastructure sector has yielded a meager 4.7% CAGR.
Only IT, Banks and Energy sectors have outperformed Nifty
meaningfully. But even in these sectors the gains have been highly skewed
towards HFDC and Bajaj twins in financials, RIL in energy and TCS in IT sectors
respectively. Adjusted for gains in these seven stocks gains in IT, financials
and energy are also mostly in line with the Nifty 500 gains of ~10% CAGR.
I am therefore dissecting the markets into 3 parts - one trading
at levels of 8000-8200 Nifty equivalent; second trading at levels of Nifty
equivalent of 9000-9200 and the third smaller part trading at current Nifty
level.
I shall focus on the first two parts and mostly ignore the third
part.
Incidentally, recently some large brokerages have changed their
stance on public sector banks and construction and capital goods. Cement is now
almost a consensus buy. I feel it is not long when auto and auto ancillary also
find place in many "Top Pick" lists.
I believe at present not investing is a bigger risk than
investing and seeing some MTM loss on your portfolio.
I hate Joy Of Missing Out (JOMO) as much as I hate Fear Of
Missing Out (FOMO).
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