Do it yourself

FY20 is the worst financial year since FY09 in terms of year on year Nifty returns. Nifty lost ~25% of its value during the year. Most of these losses have come in past one quarter (Q4FY20), during which Nifty lost close to 30% of its value. In my view, considering the present circumstances and indications visible presently, the earnings and economic growth outlook remains heavily clouded for next 2-3 quarters. Thus, there are chances that the calendar year 2020 may turn out be a disappointing year in terms of equity returns. Working on various scenarios for the Nifty levels one year from now, I concluded that Nifty may return 5-8% in next 12months considering flat earnings growth in FY21 and 10-15% growth in FY22; and valuations close to long term average of 17%. I appreciate that 10-15% yoy earnings growth in FY22 appears quite challenging in the present conditions. However, considering the lower base (no growth for 3years) and economic recovery due to easy monetary policy ...

Most brokerages and rating agencies have highlighted the severe impact of the 21 days total lock down announced by the Government of India. For example consider the following: 1.     JP Morgan estimates that the lock down will significantly impact 60% of GDP, though the post lock down rebound could be equally sharp. There will some permanent loss, depending on the length of the lock down. It expects global economy to enter into recession in H1'20, and since the India is fiscally constrained, the recovery will mostly depend upon the monetary easing and regulatory forbearance for stressed debt. 2.     Deutsche Bank feels that the total lock down has pushed India into uncharted territory. We may see an unprecedented negative GDP growth print in 4QFY20 and/or 1QFY21. The government must announce a coordinated & front-loaded fiscal/monetary stimulus to mitigate the impact of lock down. 3.     Jefferies highlights that th...

Continuing from yesterday ( see here ), I would like to share with readers what changes I have made or shall be making in due course, in preparation for the new market cycle. In my view— 1.     This new market cycle shall see a correction in the consumer behavior. The growth in the household credit (personal loans or non-corporate finance) since the demonetization (November 2016) has been relatively very high. This has mostly supported discretionary consumption and financial investment, as we have not seen significant growth in real asset building (Real Estate, MSME Capacity Building etc.). The wealth destruction caused by sever correction in financial asset prices (both equity and debt), persistent illiquidity in the housing market, and stagnant to lower wages may diminish the borrowing capacities of households in short to midterm. The relative high valuations of most consumer discretionary and consumer financing stocks with relatively lower grow...

The past 5 weeks have been most horrific period for investors in financial since the five week period in September-October 2008. A colossal destruction of investors' wealth has already taken place. There is an argument that this destruction is only a notional mark to market (MTM) loss if the investors' continue to hold the securities, as the prices will certainly recover as soon as the COVID-19 is contained; may be in 3-6 months. The proponents of this view are cautioning the investors that selling the securities at this point in time will convert the temporary MTM losses into permanent erosion in wealth. Some readers have asked about my view on this argument. I have already expressed my views on this issue multiple times in past few months. Nonetheless, I do not mind a reiteration. I believe that the market cycle in India that started from 2013 has definitely ended. Historically, the sectors and stocks that lead a particular market cycle, are not found...

Making IBC little more pragmatic Last week while on a visit to Mumbai, I noticed few aircrafts belonging to the now defunct Jet Airways parked on the airport. The aircrafts had gathered lot of dust and pigeon crap. I believe it's more than a year since these aircrafts must have been parked there. The owner/lessee of these aircraft owes billions of rupees to various lenders and operational creditors. The company is undergoing the bankruptcy proceedings and apparently so far no buyer has shown any interest in acquiring the company. I wonder, why the bankruptcy procedure be made little pragmatic! I feel one of the key purposes of the bankruptcy process must be to minimize the losses to the lenders and operational creditors. If these aircrafts that are lying idle were leased to other airlines till the completion of IBC process, at least some money could have been recovered. Or at least, Jet Airways could have been saved from incurring parking charges (which it can neve...

The bad things are easier to believe. Haven’t you noticed that? - Vivian to Edward in movie Pretty Woman While it is easy and fashionable to highlight the negatives to support the fear already instilled amongst the investors, I believe it would be in order to take note of the improvements that have taken place in recent times which would support the markets on their upward journey, whenever it begins. 1.     The current account deficit of India has shrinked to ~1% of GDP for 9MFY20 vs. 2.1% of GDP in FY19. The recent fall in current account deficit is primarily due to fall in imports due to poor domestic demand and sharp correction in energy prices (crude oil & natural gas). Fall in imports due to fall in domestic demand may not be a desirable way of lowering the current account deficit. Nonetheless, the breakdown of global energy cartel indicates that the lower energy prices may sustain for little longer, helping the recovery of Indian ec...

The sentiment on the street eerily looks similar to the one we saw during 2HFY09, post collapse of Lehman Brothers. In those days, the rumors of large banks declaring bankruptcy, sovereign defaults, imminent EU breakup, market freeze, sounded absolutely believable. These were not only market grapevines believed by the common investors. Many senior analysts at global investment banks wrote scary reports about these eventualities. Globally reputable, economists and strategists pained doomsday scenario of global economy slithering into a deep abyss to compete with the great depression post WW-I. In India, many depositors transferred money from private banks to the public sector banks. Investors summoned their advisers for details of their liquid fund portfolios. The fixed maturity plans (FMPs) backed by bank CDs were pre redeemed by paying penalties. Capital protected structured products were also called prematurely by incurring material losses. Some of the readers have l...